The outlook for commercial real estate is expected to get worse before it gets better, according to economist Tony Pierson, managing director at Hartford, Conn.-based Times Square Real Estate Investors. Pierson spoke at MBA’s Commercial Real Estate Finance/Multifamily Housing Convention in Orlando, Fla., Feb. 3-6.
Pierson says unemployment is driving the demand fundamentals of the economy. With the labor market deterioration, commercial real estate will continue to be adversely affected until unemployment hits bottom, because employment growth drives real estate growth.
On average, Pierson says the employment cycle measures 13 months from peak employment to trough. So far, the current economy has been going down for 10 months. "That means we’ve got three to four more months of job losses," Pierson says. He predicts an average of1.9 million lost in jobs, and a late 2002 recovery in the third or fourth quarter of 2002.
But real estate is in a better position than it was in the economic downturn of 1991, because markets haven’t been overbuilt, the capital markets have been more responsive, and pension funds are looking toward real estate as steady investments, he explains.
Construction levels also decreased in all the property types from 2000 to 2001. Construction was down 27% in the office sector, 21% in hotel, 24% in industrial, 11% in retail and 7% in multifamily, according to Pierson.
Even in this bleak environment, Pierson maintains that good commercial real estate investments are still out there. He says real estate’s attractive income yields, which offer protection in a downturn, pique investors’ interest.