In June 2001, I wrote a column arguing that the commercial real estate industry was in denial about the weak state of the economy and its potential debilitating effects on tenant demand. In the preceding months, our news stories were peppered with hollow phrases from industry cheerleaders who made repeated predictions of a soft landing.

That “pain-free” landing, of course, was an illusion. Office vacancy continued to climb as the employment picture worsened. The terrorist attacks of 9-11 sent the U.S. economy into a short recession. By late 2003, the national office vacancy rate had soared to 16.9%, according to data researcher Reis.

Now we're in the homestretch of what is proving to be a highly volatile year. And despite the subprime meltdown that triggered a wave of corporate layoffs in August affecting some 35,000 workers in the financial sector, I keep hearing that this is a temporary condition, a minor blip.

The problem is that when the economy is in a transition period — as we are now — the lagging real estate data is often at odds with what's happening in the trenches. Recall that even as office vacancies were spiraling out of control in 2003, the job market had already begun to show clear signs of recovery. There were only 342,000 net non-farm jobs lost in 2003 compared with a net loss of almost 1.5 million jobs in 2002. The economy then caught fire, creating more than 1.4 million jobs in 2004. In transition periods, it takes a few months for real estate fundamentals to accurately reflect the big picture.

It's impossible for the market to sustain the tear that it's been on relative to investment sales activity in the absence of stronger job growth. Yet optimism reigns supreme. In a Sept. 14 research note titled “Commercial Real Estate Services Fundamentals Remain Robust, Despite Turbulence,” J.P. Morgan Securities gives an “overweight” rating to brokerages CB Richard Ellis and Jones Lang LaSalle, effectively a vote of confidence. As of Sept. 24, CBRE's stock price was down 33% from its 52-week high and JLL was down 19%.

The report from J.P. Morgan sees continued solid investment sales activity in the U.S. despite tightening credit markets and growing employment concerns. “Our discussions with industry sources verify that highly leveraged buyers are out of the market, but it appears that well-capitalized buyers are continuing to purchase commercial real estate.” J.P Morgan is quick to add that global leasing activity is robust at the two brokerage giants, but that a prolonged slump in employment could cause some moderation in leasing.

That is an understatement. The Federal Reserve's decision to cut the Fed funds rate by 50 basis points to 4.75% on Sept. 18 signaled that the economy is troubled. In the short term, office absorption will slow and vacancies will rise. There will be some pain and the industry will adjust. Of course, this reality will be easier to see if we dispense with our rose-colored glasses.