The market for commercial real estate should continue to remain strong through 2007, according to a recent report from the National Association of Realtors.
For the second quarter of 2006, The Commercial Leading Indicator for Brokerage Activity, a leading indicator for the commercial real estate, was 119.4, marking a 0.4 percent increase compared with a reading of 118.9 in the first quarter of 2006 and a 2.5 percent increase compared with a reading of 116.5 for the second quarter of 2005. The second-quarter index also marked the fifth straight quarter of growth.
The association?s commercial leading indicator is a tool to access market behavior in major commercial real estate sectors. The index uses 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance.
“On the most fundamental levels, the economics of commercial real estate remain very viable right now,” said John Cordish, vice president of Baltimore-based development company The Cordish Co. “It?s a different market than the residential market, which has its own set of challenges at the moment.”
Cordish added that in Maryland the market for commercial real estate could fare better than other regions.
“What you?ve got in Maryland is a situation, where on a macro basis, it?s still somewhat underserved relative to other regions ? particularly in retail,” said Cordish. “So you?ve still got a very attractive environment for retail versus other real estate sectors.”
But while NAR officials expect growth in commercial real estate to continue into 2007, the association?s chief economist, David Lereah, said that growth will be slower than in recent quarters due to other factors in the economy.
“We are seeing a deceleration in the rate of growth ? apparently in response to higher oil prices and interest rates ? so the expansion in net absorption and commercial construction should continue, but at a slower pace,” said Lereah.
John Hopkins, an associate professor of applied economics at Towson University?s RESI, said that the NAR?s second quarter numbers are indicative of a shift in the overall real estate market.
“It confirms what we?re seeing with today?s economy, which is experiencing a shift in strength from the consumer to the business sector,” said Hopkins. “In Maryland we?re seeing a microcosm of the nation, so it?s no surprise that there is a lot of activity in the downtown area. But the higher growth within the commercial real estate is at the same time that we?re seeing a slowdown in residential real estate.”
Hopkins said, however, that there is a negative aspect to the growth in commercial real estate.
“There is a downside to all this business activity and that?s in the higher oil and other commodity prices,” said Hopkins. “What that is doing is increasing business costs. So what [companies] are doing is they?re hiring at a slower rate.”
More detail
» The NAR is projecting that in the fourth quarter of 2006, between $300 million and $310 billion in new commercial construction is expected.
» $296 billion in new commercial construction was recorded in the second quarter of 2006.
