CRE Recovery Also Depends on Jobs

In terms of the broader economy and the prospects for commercial real estate, whether the recovery can continue depends a lot on the labor market.

Chicago–“For the U.S. economy, the recovery has been stronger than expected,” began Sam Chandan, global chief economist for Real Capital Analytics at the IPD Fourth Quarter U.S. Real Estate Results seminar at the Trump International Hotel and Towers. “But the question now is whether it can be sustained. A lot now depends on the pace of the labor market recovery, both for the broader economy, and the prospects for commercial real estate.”

Chandan spoke before a packed room at an event sponsored by real estate performance and data specialist IPD North America. Also speaking were Susanne Cannon, chairman of the Department of Real Estate of DePaul University, who made the introductory remarks, and Simon Fairchild, managing director of IPD North America.

“One of the key shifts in the economy over the last year was the transition to the private sector as the main driver of growth, as opposed to during 2009 and early 2010, when public expenditures were keeping the economy afloat,” Chandan said. “By the fourth quarter, the government was making a relatively small contribution, especially state and local governments. Consumers were back in the driver’s seat.”

Now that the economy is chugging along, will employers start hiring enough workers to put the millions of Americans who lost their jobs in the wake of Panic of 2008 back to work? Probably, but indications are that labor will continue to see a slow labor recovery–the slowest, in fact, in modern times. “Hiring has been slow for a number of reasons,” Chandan noted. “So far businesses have largely boosted profits through cost savings and productivity gains, so they haven’t seen the need for a lot more hiring, especially given the uncertainty about sales growth. Also, there’s still a lot of uncertainty about the direction of healthcare reform and Dodd-Frank.”

As for CRE, investment activity spiked considerably in 2010, led by REITs, both public and non-listed, who are flush with cash and in a buying mood. Lenders were also major “investors” in CRE as they took possession of distressed assets. Chandan explained that during the fourth quarter, however, distressed commercial real estate reached an inflection point. “The amount of workout activity for distressed properties finally outpaced the volume of new distressed properties added to the total,” he said.

The apartment market, of course, is the star among income-producing properties these days, and for now that’s likely to continue. But Chandan pointed to uncertainty on the horizon for that sector as well, especially when it comes to multifamily finance. “It isn’t clear exactly how multifamily finance will change, but the government has signaled its determination, with the Treasury and HUD report on Fannie and Freddie, that it will change,” he said.

Simon Fairchild concluded the seminar by offering some interpretations of the large streams of real estate data that IPD generates. Among other observations, he noted that while income and capital growth had returned to U.S. properties across all the sectors in 2010, over the last decade the main source of return–virtually the only source, on average–has been income. Whatever capital growth occurred in the earlier 2000s was decimated by the events of the later 2000s.

A much fuller report on U.S. CRE fundamentals in 2010–for this is reporting season for companies like IPD–will be offered by IPD at its U.S. Annual Index Launch Index in March in New York.

This article was written for Commercial Property Executive.