Economist: Recession Creeping Into Market

"The indication is the slowdown in the housing market is starting to impact the overall economic pattern of the US," Dr. Sam Chandan with the New York City-based REIS told the D/FW Real Estate Research Forum at its luncheon yesterday in North Dallas. "There is a growing consensus among economists of significantly lower growth as we go into 2007."

Like his peers, Chandan pinpoints declining consumer demand as the greatest near-term threat for the economy. The telling will be in the upcoming holiday shopping season as researchers keep close tabs on what is bought and how much is spent--both long-trusted barometers of consumers' mindsets about the nation in general. He said core prices, minus energy and food, rose 2.9%, driving a cost-consciousness to the forefront of spending patterns. In the third quarter, consumer spending rose 0.8% in comparison to 1% in Q3 2005.

Going forward, it will become more important than ever to base commercial real estate decisions on the submarket rather than the market at large. "Regardless of what market you're in, there are submarket opportunities," Chandan explained.

In Texas, the shining star once again is Austin. It's the only city in the state to make REIS' Top Five list. He added, though, that Austin's present-day gains can't override its past: leases are being signed at "significant discount" to the ones that are expiring due to the change in the overall rents in recent years.

In the US outlook, Chandan predicts vacancies will rise in all commercial sectors in 2007. Concessions most likely will rise as well.

The multifamily sector has marked its 18th consecutive quarter of rent gains, with Q3 bringing a 1.2% hike. Effective rents rose for 10 consecutive quarters, closing Q3 with a 1.4% uptick. Vacancy is 5.4%, its lowest level since 2001. Chandan said the only cushion for 2007 is construction has been constrained, partly attributable to rising costs of materials and labor. The prognosis translates into a projection of rent gains of 4.2%, 3.6% and 3.5% in 2006, 2007 and 2008.

The US office sector posted a record gain of 2.3% in the third quarter. But, the quarter's absorption wasn't as strong as earlier in the year. "Don't be surprised if we see a pause in the office market," Chandan said. "It's likely to plateau in the fourth quarter." Like other sectors, the tight rein on construction "will help to protect us," he added, predicting annual deliveries through 2009 will be less than half of the 2001 completions. Effective rent growth will hit 7.8% this year, but dip to 4.4% in 2007 and 4.5% in 2008. The present-day scenario is effective rents are at their highest level since Q3 2002.

Neighborhood and community center vacancies went up 20 basis points in the third quarter. To date this year, effective retail rents rose 2.5% and asking rents climbed to 2.8%. Third-quarter construction completions totaled three million sf in the most active nine markets. This quarter, he said the count will be more than double the amount of deliveries in comparison to the first three quarters.

In the industrial sector, vacancy is predicted to be 9.4% by year's end and 9.2% at the 2007 close. Effective rents rose 3% in 2005 and have been making progress ever since. With construction going full throttle, a problem of excess space could arise if the retail market starts to sag, Chandan said.

Meanwhile, commercial banks are tightening standards. "It has the potential to forewarn us," Chandan said. "The availability of capital and the fundamentals that we've observed in the past couple years has the potential to reverse."

Chandan said whether the slowdown will evolve into a full-blown recession is uncertain because some vital signs are in place and others are not. The impact of the nation's mid-term elections also factors in an unknown. "It's difficult to get a preliminary sense of what the change in Congress will mean for the overall market," he told GlobeSt.com. "It remains to be seen what can be accomplished in a renewed relationship with the executive branch."