Market forecast CCIM Feature

No Replay

This year's recovery is not a repeat performance.

The U.S. economic recovery started 2012 with a flurry of happy uptrends. From a real estate perspective, the most encouraging indicators were found in the employment data. In the three months ending in February, the U.S. economy cranked out 757,000 net new jobs. Excluding temporary census hiring, this was the strongest three–month stretch of job creation since 2006.

A hefty percentage of the jobs created generate demand for commercial real estate space. The professional and business services sector (highly correlated with the office market), the manufacturing sector (highly correlated with the industrial warehouse market) and the retail sector accounted for 48 percent of total employment gains.

Moreover, consumer spending data looked robust, and equity markets were rallying. The U.S. economic recovery and the property markets appeared to be off and running. Even perpetually gloomy economists began revising their forecasts upward. The eternal optimists began bragging that they had called it.

Déjà vu All Over Again?

Then toward the end of March, the economic data suddenly softened, eerily similar to last year. Once again, spiking oil prices were the initial culprit. Brent crude prices jumped to more than $125 per barrel, and gas prices rose to nearly $4 per gallon in April. Déjà vu.

The respite from the European Central Bank's long–term refinance operation had run its course, and the euro crisis was once again at center stage. Déjà vu. Greece failed to form a coalition government, and the odds of a disorderly default began to mount. Déjà vu.

In the U.S., warm–weather effects caught up to the data, and the slowdown in retail sales and job growth in April indicated the initial uptrends weren't quite as happy as we initially thought. Déjà vu. The naysayers did a quick 180 and revised down their forecasts. The optimists looked at the softening trends and stopped talking abruptly, in mid–brag. Déjà vu.

Given the numerous similarities, many have suggested that 2012 will be a replay of 2011: another year where the U.S. recovery shows flashes of improvement, before inevitably falling flat on its face.

Signs of Maturity

While there are plenty of reasons to remain skeptical, there are also many new developments that suggest the U.S. recovery is maturing; it is not robust, but it is not fading away either. Here are four key reasons to remain optimistic.

Households have stronger balance sheets. After three years of paying down debt, consumers' balance sheets look terrific. The household debt service ratio, which is a measure of debt payments to disposable income, looks as good as ever. This reflects 70 percent of the U.S. economy — consumer spending — that is poised to grow at a healthy rate in 2012. And in fact, through May, consumers were borrowing more and spending more than at any other point in this recovery cycle.

Retail sales are up nearly 7 percent this year compared to a year ago. Consumer credit also has trended up since November 2011. Both revolving and especially non–revolving debt are rising. The stronger spending patterns are finally showing up in stronger demand for retail space. The U.S. retail sector absorbed 3.4 million square feet in the fourth quarter of 2011, and 3.1 msf in 1Q12 — a growth rate that is five times faster than at any other point in the recovery cycle.

Consumer confidence is holding up. Because of better balance sheets, consumers do appear to have grown thicker skins this year. Last year, the rise in gas prices was a key reason for the plunge in confidence and, ultimately, a retrenchment in consumer spending. This year, when gas prices rose to nearly $4 per gallon in April, consumer confidence held up. So it appears as though it will take a lot more to rattle the consumer this year. In the latest reading from the University of Michigan, consumer confidence increased in May to its highest level in four years.

The improvement in confidence is critical because of the strong correlation with increased spending. The employed, who represent roughly 92 percent of the workforce, are in a much stronger financial position this year. They are spending more, which is creating jobs, which will, in turn, create a larger pool of people spending more, which will create more jobs. Thus, we are entering into a positive feedback loop, which is encouraging.

Housing is showing steady improvement. The very sector that led to the global financial crisis, housing is now showing steady improvement. Through the first four months of 2012, existing home sales are averaging a pace of 4.6 million annualized units, up 21 percent from the pace recorded last August. Home prices are growing at a rate of 2.5 percent in 2012. Housing starts are also picking up, now close to an annual pace of 700,000 units. The industrial warehouse sector, in particular, will benefit greatly from an improvement in housing. Prior to the recession, residential building materials accounted for almost 20 percent of the industrial warehouse demand.

Manufacturing, technology, energy are economic bright spots. The manufacturing sector is on an absolute tear. In fact, you need to go back to the mid–1990s and then all the way back to 1970 to find higher job growth numbers in manufacturing. The Institute for Supply Management manufacturing index trended up again in April to a reading of 54.8, and the new orders index jumped, indicating the manufacturing sector will continue to expand.

The technology sector is another clear bright spot in the U.S. economy. Venture capital money is pouring back into tech, particularly in the areas of mobile technology and social media. Venture capital investments in tech rose 22 percent in 2011. Office rents in tech–driven markets such as San Francisco are soaring, up 30 percent in 1Q12 compared to a year ago.

Lastly, the energy sector continues to be a major growth sector. Western North Dakota, Houston, Dallas, Denver, and parts of the Northeast region are benefitting from strong growth in both oil and natural gas exploration and related manufacturing.

Moving Forward

To be clear, sizable downside risks remain. The chief threats include the euro crisis, the ongoing housing foreclosure crisis, a slowing Chinese economy, another oil spike, and the so–called fiscal cliff still facing the U.S. If any one of these threats were to take a sharp turn in the wrong direction, they could derail the recovery.

It is worth noting, however, that even with all of these downside risks factored in, the consensus is that the U.S. economy will continue to expand. Most analysts expect U.S. real gross domestic product growth to range between 2 percent and 3 percent in 2012. The forecast growth in the U.S. economy isn't exactly exciting, but it is a long ways from where we were at this stage in the cycle last year.

The latest survey of economists shows that the odds of a recession occurring, which were nearly at 50–50 in mid–2011, are now down to slightly over 1 in 4 in April 2012. In other words, there is 75 percent probability that the U.S. recovery will continue. If the recovery follows this script of 2 percent to 3 percent GDP growth, then the U.S. will create more than 2 million net new jobs in 2012, and we will see vacancy in most commercial real estate sectors fall by 50 basis points to 100 bps this year.

The commercial real estate sector is climbing back. Although this recovery remains fragile and things can easily go wrong, it appears we are finally at the stage in the cycle where more things will continue to go right.

Kevin J. Thorpe is chief economist for Cassidy Turley Real Estate Services and based in Washington, D.C. Contact him at


Checking In With Hospitality

Fall 2022

The hospitality market continues to recover faster than anticipated, but some sectors continue to lag and headwinds are gathering.

Read More

Ready Your Business for Recession

Fall 2022

While the market is unpredictable, preparations can and should be made for difficult economic times.

Read More

Appraising Change

Fall 2022

Climate change, shifting criteria, and growing complexity in assets are facilitating an evolution in commercial real estate valuation.

Read More

Investing in New Business

Fall 2022

By learning how to work with fiduciaries, who oversee more than $5 trillion in assets, commercial real estate professionals can access a healthy stream of revenue.

Read More