NAR launches commercial real estate index

“The index incorporates 13 variables that reflect future commercial real estate activity,” said David Lereah, NAR’s chief economist, in a news release. “Our methodology follows a well-known process of looking at changes in individual indicators and then weighting them appropriately in a process that results in a single indicator of future market activity.”

Factors examined in the index include industrial production, manufacturers’ durable goods shipments, wholesale merchant sales, retail sales, food service and the real estate investment trust price index.

The index reviewed historical quarterly data dating back to the first quarter of 1990. An index of 100 is defined as the level of commercial real estate market activity during the first quarter of 1990, the first period to be analyzed.

What the index shows, Lereah said, is broad recovery in commercial real estate markets, and the recovery is expected to continue.

“In fact, the index increased in nine of the last 10 quarters,” he said. “This trend implies that commercial activity of net absorption and the completion of new buildings will remain solid through the third quarter of this year.”

During the fourth quarter of 2005, the commercial leading indicator was at an index reading of 117.6, up 0.8 percent from 116.7 in the third quarter; the reading was up 1.6 percent from the index of 115.7 in the fourth quarter of 2004.

Net absorption in the office and industrial sectors during the third quarter of 2006 is likely to be in the range of 125 million to 140 million square feet.

The value of new commercial buildings reaching the market is projected to be $4.5 billion to $6 billion higher than the $252.4 billion recorded in the fourth quarter of 2005.

Other NAR data supports the index findings that commercial activity could increase in the next several months.

Findings of NAR’s February Commercial Practitioner Survey show that most commercial practitioners rate current business activity as improving or holding steady. In that survey, 12 percent of commercial practitioners said business was deteriorating. And 74 percent of practitioners are optimistic, while 9 percent are pessimistic, about business conditions for the next year.

When asked about the relationship between local rents and operating costs, 32 percent of respondents to the Commercial Practitioner Survey said costs are rising faster than rent, and 45 percent said both were rising at about the same rate; nearly a quarter said rents were rising faster.

In terms of market impact, 51 percent said private local investors are having a significant impact; 49 percent said developers, 25 said percent end users, 17 percent said private national investors and 11 percent said foreign investors.

With market fundamentals improving in most markets, 57 percent said new local tenants, users or startups were creating demand for space, 45 percent identified existing tenants or user expansion, and 27 percent said new national or international tenants or users.