The national economy has a 40% to 50% chance of slipping into a recession, according to the latest research conducted by Robert Bach, senior vice president and chief economist for Grubb & Ellis Company.

“The times are as challenging as they have been since the last recession of 2001, and the possibility of a recession in 2008 is not off the table,” says Bach. “Tenants can look forward to better deals in 2008, but if the economy slows as expected, they may be less inclined to act on them.”

With or without a formal recession, Bach predicts that growth in gross domestic product and jobs, key drivers of commercial real estate demand, will slow moderately in 2008. He expects payrolls to tally under 100,000 new jobs per month, less than the 125,000 average for 2007 and far below the 189,000 average in 2006.

For the office market, Bach is predicting space absorption of around 36 million sq. ft., or about half the absorption recorded in 2007. But given the modest level of new construction coming online during the next 12 months — 55 million sq. ft. or a 22% increase over 2007 – office vacancies are expected to tick up only 20 basis points, from 13% nationwide to 13.2% by year-end 2008.

Rent increases will moderate significantly, with CBD rents increasing 3% and suburban rents rising 2%, much lower than the 19% and 9% increases, respectively, registered by landlords in 2007.

CBDs with the top rental rates at year-end 2007 included New York’s Midtown at $94.00 per sq. ft.; Calgary, Canada at $62.52 per sq. ft.; New York’s downtown at $61.20; Boston at $60.00; and Toronto, Canada, which registered $58.15 per sq. ft.

The nation’s industrial sector is well positioned to weather the storm, according to Bach. He expects industrial markets to remain balanced through the year, with slowing retail sales and consumer demand being offset by the weak dollar supporting demand for manufacturing space. Also the technology sector is increasing demand for flex and R&D space.

Industrial vacancies should grow from 7.6% to 7.8% in 2008, with net absorption slipping from 140 million sq. ft. in 2007 to 120 million sq. ft. this year.

Not surprisingly, the retail and hospitality industries are facing the steepest challenges in the year ahead, since they are so closely tied to consumer spending. Bach expects consumer spending to slow moderately over the course of the year, dragging down retail sales, while stronger retailers use the opportunity to grab market share through expansion and repositioning. Weakening corporate profits and slower job growth will challenge hoteliers, while the weaker dollar could bring more business to properties in big cities, resort destinations and markets near the Canadian border.

Apartments should fare well in 2008, given that market conditions likely will not change much from late 2007. Modest job creation and wage growth, high home foreclosure rates, and flagging home prices all favor renting.

2008 presents an entirely new landscape to the investment markets, and Bach expects investors to weigh in with gusto once buyers and sellers “close the expectation gap and meet somewhere in the middle.”

In a dramatic departure to the 2007 buy/sell dynamic, Bach expects all-cash and low-leverage buyers — institutions, REITs and foreign investors — to increase purchases as the credit squeeze restrains high-leverage private equity investors, the dominant players in 2007.

Transaction volume in office properties, though falling an expected 25% from the record levels of 2007, is expected to be brisk. Capitalization rates could rise by 100 basis points, with rates on Class-A properties in supply-constrained coastal markets seeing less movement than Class-B and Class-C properties in secondary and tertiary markets.