Market forecast

2006: Three Possible Scenarios

These factors will affect the market this year.

Decelerating Growth (15% probability)

Baseline (75% probability)

Accelerarting Growth (10% probability)


Energy prices continue to rise, inflation takes hold, consumer spending slows, interest rates increase, and housing boom ends.

Essentially more of the same, with job growth of 1.5 to 1.7%, moderate inflation, a gradually slowing housing market, and a sustained expansion.

Business spending leads to faster job and personal income growth, and falling energy/oil prices and lower inflation generate another surge in consumer spending.

GDP growth

Negative to 0%
3% to 4%

Job growth

Severe job loss (construction, finance, etc.). Job growth is close to zero.

Business investment continues to expand with annual net job growth of about 2 million.

Strong economic expansion fueled by high levels of business spending, high productivity, and stronger-than-expected job growth.

Consumer spending

Consumer spending contracts succumbing to high oil prices and slower housing market.

Consumer spending slows slightly due to housing slowdown and higher fuel costs, but stays positive.

Personal income is strong and inflation remians well-contained. Consumers continue to do what they do best -- spend.

Business expansion

Consumer cyclicals and businesses affiliated with the housing market suffer.

Business expansion generates moderate hiring, providing a strong underpinning to a sustainable recovery.

Business spending grows rapidly. Research and development spending surges. new capacity needs to be added.


High energy prices push inflation levels above 4%.

Steady inflation at approximately 2/5%. Oil production catches up demand and home prices stabilize.

The economy grows faster, but with enough workers and global capacity, keeps inflation in check over the short term.

Interest rates

The Fed reverses course to provide monetary stimulus. 10-year treasury yields move up sharply, before gradually declining.

Federal funds rate evens out at about 4.5%. 10-year treasuries gradually ervert to historical real levels of approximately 5%.

Federal funds rate stabilizes at about 4.5%, although inflation and interest rates eventually move up.


Negative absorption and higher vacancy. Financial centers struggle the most.

Office absorption continues its comeback. NOI grows as landlord pricing power returns.

Office demand is back with a vengeance and supply has a hard time keeping up. Higher rents result.


Durable goods spending declines sharply, slowing warehouse demand.

Warehouse continues a steady recovery with lower vacancies and rent traction.

Strong economic growth and consumer spending will increase demand for warehouse/distribution space. Lower vacancies and higher rents will result.


If economy slows, fewer new jobs and less need for apartments will result. Condos coming back as rental units will weaken apartment rents.

A good scenario for apartment occupany. Solid job growth means plenty of renters.

Strong job market fuels demand for apartments.


Retailers suffer as consumer spending slows and unemployment rises.

Retail sales remain solid, but the slight slowdown in spending leads to more retailer consolidation.

Consumers keep retail sales strong, and retail sector continues strong.


Weak economic growth reduces business travel and high energy costs keep consumers home.

Travel is back, and hotels do well.

Demand is strong enough that it holds off the eventual surge in new hotel supply.

Chart 1: The Baseline is Best Chance for a Long Recovery

Chart 2: Too Hot, Too Cool, Just Right