Fourth quarter Commercial Real Estate Index eases

WASHINGTON – Feb. 21, 2008 – The Commercial Leading Indicator for Brokerage Activity slipped 0.4 percent to an index of 120.1 in the fourth quarter from a reading of 120.6 in the third quarter, but remains 0.1 above the fourth quarter of 2006 when it stood at 119.9.

This is the second straight quarterly dip after reaching a record of 120.7 in the second quarter of 2007. The index showed nine consecutive quarterly gains prior to these declines; NAR’s track of the index dates back to 1990.

Lawrence Yun, NAR chief economist, says the latest index suggests reduced business opportunities for commercial real estate practitioners in the months ahead. “The decline in the index implies that commercial activity, as measured by net absorption and the completion of new commercial buildings, is likely to contract moderately over the next six to nine months, which is consistent with an expectation for slower overall economic expansion in upcoming quarters,” Yun says.

Rising unemployment insurance claims and falling durable goods shipments were the key factors in lowering the CLI, but a weaker rate of return on investment as measured by the NAREIT Price Index was also a factor. The only positive contributors to the index were growth in wholesale and retail trade, and rising personal income.
 
“The latest data imply that investment in private nonresidential structures, which rose a solid 13.2 percent in 2007 according to a preliminary GDP estimate, could show only minimal growth or even decline in 2008,” Yun says. “Realtor members who specialize in office and industrial properties indicate in a separate survey2 that they anticipate a measurably lower level of business activity in the upcoming quarters.”

The Commercial Leading Indicator implies weakening activity for commercial leasing and building sales activity. “Commercial practitioners can anticipate a weaker, though positive, net absorption in the office and industrial sectors later in the year with fewer new commercial buildings reaching the market,” Yun added.

The commercial leading indicator is a tool to assess market behavior in the major commercial real estate sectors. The index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate.

The 13 series in the index are industrial production, the NAREIT (National Association of Real Estate Investment Trust) price index, NCREIF (National Council of Real Estate Investment Fiduciaries) total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufacturers’ durable goods shipment, wholesale merchant sales, and retail sales and food service.

© 2008 FLORIDA ASSOCIATION OF REALTORS
 

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