At the same time, a new report from Marcus & Millichap's National Office and Industrial Properties Group shows that despite the clear decline in deal flow, the US office sector remains poised to generate more than 4,000 transactions in 2008. That would rank 2008 on a par with 2004 levels and well above the average from 1995 to 2005.

In its recent revision of GDP figures for the second quarter, the Commerce Department adjusted its estimate for the nation's second-quarter GDP growth to 3.3% from its earlier forecast of 1.9%. The new figures confirmed what Nadji had forecast during a webinar conducted by GlobeSt.com earlier this summer, and the GDP figures carry significant implications for the commercial real estate industry.

Nadji explains that he expected the 3.3% GDP growth for a number of reasons. First, the economic stimulus checks that US consumers were spending provided "a large boost in consumption" that bolstered economic growth. Second, Marcus & Millichap expected that rising US exports would help to offset the drag that housing has been exerting on the economy.

Another factor that Nadji cites is the relatively mild loss of jobs in this downturn compared with previous cycles. "Going into the fall of '07, I thought we were headed for a milder loss of jobs than we faced in previous downturns because payrolls remained very lean and companies stayed very conservative in their hiring during the expansion cycle that we had from December of 2003 to December of 2007," Nadji explains. "Fewer jobs gained on the way up means fewer jobs lost on the way down. From the standpoint of employment, which is what's most important for commercial real estate, it didn't look to us like there were going to be massive job cuts."

Nadji is quick to point out that he is not trying to paint a rosy picture or to deny that times are uncertain, but to put the economic data into perspective. "While it's good news that we didn't have bloated payrolls and are therefore not going to have severe job cuts, the bad news is that we don't have any impetus for growth right now, so it's not like a big rebound is waiting for us around the corner," he says.

Despite the relatively robust second-quarter GDP figures, Nadji says that Marcus & Millichap is "quite concerned with the rest of the year," expecting that GDP growth will settle at about 1% to 1.5% in the second half of 2008. While those numbers are weaker than the 20-year average of 3% for GDP growth, they are nonetheless positive, the Marcus & Millichap research chief points out.

Another salient point, Nadji notes, is that even without the benefit of the economic stimulus spending, the economy would have grown by nearly 2% in the second quarter. Housing is dragging down GDP growth by about 1% to 1.25%, he says, so if housing would just bottom out--which Marcus & Millichap expects to be the case by about mid-year next year, "We would be back to pretty normal growth numbers," Nadji says.

Nadji's call to keep economic numbers in perspective echoes a theme in the report by the Marcus & Millichap National Office and Industrial Properties Group, which although market velocity has declined from the boom years, the office sector remains poised to generate 2008 transaction levels "well above the average from 1995 to 2005." The report advises that, "Given the volatility of the capital markets, investors must separate the actual from the perceived to succeed in today's office investment climate."

Alan L. Pontius, managing director of the Office and Industrial Properties Group, comments that although deal flow has slowed in comparison with peak levels of 2005 to 2007, today's levels "do not justify the 'market is dormant' perception that permeates the investor mind-set today." According to the new report on office transactions, velocity declined 27% in the first quarter of 2008 compared to the same period last year, with higher-priced tiers being hardest hit. And while velocity and dollar volume have both declined, they are tracking toward levels well above the last market bottom of 2001.

The new report by the Office and Industrial Properties Group also observes that, while many industry experts focus on transaction dollar volume when assessing the health of the market, focusing on dollar volume alone "generates an artificial high-tide" because it doesn't take into account unusual one-time deals like Blackstone's purchase andsubsequent reselling of the Equity Office Portfolio. "These transactionsinflated the average monthly dollar volume during the first sevenmonths of 2007 by 27%," the Marcus & Millichap report notes.

The report also makes the point that, "While there is no question that the credit crisis has made financing larger transactions particularly difficult and velocity may constrict further in the coming months, both equity and debt capital remain available for properly underwritten assets with positive cash flow." As examples it cites the recent closing of the General Motors building and three other office assets in New York Citythat Macklowe Properties sold, plus the pending sale by Deutsche Bank of several office assets it took back from Macklowe.

Instant Insights /

GDP, Investment Sales Suggest Stability

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