March 30, 2009

C orporate Profit Growth Per Year 
       Pretax with Adjustments

Corporate profits fell by 10.1 percent in 2008, the sharpest annual drop since 1970. In the fourth quarter alone, profits plunged by 16.5 percent at a seasonally adjusted annualized rate, the largest quarterly decline in 55 years. Corporate profits are a leading indicator of job growth, which itself is a leading indicator of tenant demand for commercial real estate, suggesting that demand will remain soft into 2010. If there is a silver lining, it is that the stock market, which has been on a tear in the past three weeks, leads corporate profits by about six months. Unfortunately, the stock market is so erratic that its usefulness as a forecasting tool is suspect. But combined with recent economic releases on housing and durable goods that were better than expected, it does suggest that the pace of decline in the economy is moderating. Commercial real estate is facing a couple of painful years. The sooner the economy bottoms out, particularly corporate profits and job losses, the sooner the industry can begin to gage the full extent of the damage done to occupancies, rents and property values.
Source: U.S. Bureau of Economic Analysis, Grubb & Ellis

Robert Bach, Senior Vice President, Chief Economist, has 30 years of professional experience in real estate market research, consulting and city planning. His commentary on the real estate markets is provided here on a weekly basis.

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Robert Bach
Senior Vice President, Chief Economist
312.698.6754

 

March 23, 2009

Average Lease Size

One sign of the recession’s impact on commercial real estate is that tenants are taking less space per deal. The average industrial lease signed in the first quarter of 2009 shrank to a decade-low 22,974 square feet while the average office lease of 12,808 square feet was barely above its 2008 low point. To put this into perspective, the average industrial lease signed in the first quarter was 43 percent smaller than the quarterly average from 2000 through 2008, and the average office lease was 50 percent smaller. There are several reasons behind this trend. Tenants signing new leases may have implemented previous staff reductions and are taking the opportunity to right-size their space. A related trend is that tenants may be less optimistic about expanding in the future and so are taking less space now. A third reason could be that smaller, more nimble companies are willing to grab the good deals being offered by landlords while large, publicly traded companies are waiting for the recovery to take hold.
Source: Grubb & Ellis

Robert Bach, Senior Vice President, Chief Economist, has 30 years of professional experience in real estate market research, consulting and city planning. His commentary on the real estate markets is provided here on a weekly basis.

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Robert Bach
Senior Vice President, Chief Economist
312.698.6754

March 16, 2009

Household & Business Debt as Share of GDP

One of the headwinds facing the government as it seeks to get credit flowing again is that households and businesses are reluctant to borrow right now unless they have to, for example commercial property owners who need to roll over their loans. Outstanding household debt obligations, including mortgage and consumer credit, are close to 100 percent of GDP, while non-financial business debt is near 80 percent of GDP, the highest such ratios since the Federal Reserve began tracking the data after World War II. Households and businesses are cutting their spending in order to pay down debt. While this makes sense in a weak economy, it contributes to the downturn when everyone does it at the same time. Retailers and their shopping center landlords are feeling the effects as consumers boost their savings, while office and industrial property owners are being hit as businesses downsize or postpone expansion plans in order to strengthen their balance sheets.
Source: Federal Reserve, Bureau of Economic Analysis, Grubb & Ellis

Robert Bach, Senior Vice President, Chief Economist, has 30 years of professional experience in real estate market research, consulting and city planning. His commentary on the real estate markets is provided here on a weekly basis.

Need more information? Contact:

Robert Bach
Senior Vice President, Chief Economist
312.698.6754

March 9, 2009

Job Losses Related to Post-War Recessions

The labor market shrank for a 14th consecutive month in February as employers eliminated 651,000 net payroll jobs. Cumulative job losses total nearly 4.4 million, a decline of 3.2 percent since the recession began in December 2007. On a percentage basis, this decline already is steeper than all but three of the 11 post-war recessions, while the 14-month span is longer than all but two. The three recessions with the steepest employment drops were in the 1940s and 1950s when the economy was transitioning to peacetime. The recession that began in March 2001 ended just eight months later in November, but employment did not bottom until August 2003, a situation called a jobless recovery. Looking ahead, job losses are likely to extend through 2009, and the recovery, when it comes, could be tepid. Expect a two to three-year softening cycle for commercial real estate.
Source: U.S. Bureau of Labor

Robert Bach, Senior Vice President, Chief Economist, has 30 years of professional experience in real estate market research, consulting and city planning. His commentary on the real estate markets is provided here on a weekly basis.

Need more information? Contact:

Robert Bach
Senior Vice President, Chief Economist
312.698.6754