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Wednesday, December 05, 2007

O.C. Register on CRE: Turn out the lights ...

by Calculated Risk on 12/05/2007 01:00:00 AM

"The party is over"
Jerry Anderson, President, Irvine-based commercial real estate brokerage
From Jon Lansner at the O.C. Register: Commercial real estate ‘party is over’
Stan Ross, chair of USC Lusk Center for Real Estate ... said today that the nation likely will have a weaker economy next year, and “that spills over into the commercial sector.” Ross stopped short of predicting a commercial downturn. ...

Commercial real estate “will clearly be impacted” by a weaker economy, Ross said. “The question is how much and where and what products.”
...
Jerry Anderson, newly appointed president of Sperry Van Ness, an Irvine-based commercial real estate brokerage ... forecast an end to a 7-year-long boom, saying that “the party is over.” issued a prediction today that commercial real estate values will decrease by 10% to 12% next year. ... “It’s been a wild ride, but now it’s over.”
Historically non-residential investment in structures follows residential investment by between 3 and 8 quarters; with the normal lag of about 5 quarters. Based on this typical relationship, at the end of 2006 I started forecasting a slowdown in CRE at the end of '07.

Residential vs. Nonresidential Structure Investment Click on graph for larger image.

Investment in non-residential structures continues to be very strong, increasing at a 14.3% annualized rate in Q3 2007.

This graph shows the YoY change in Residential Investment (shifted 5 quarters into the future) and investment in Non-residential Structures. In a typical cycle, non-residential investment follows residential investment, with a lag of about 5 quarters (although the lag can range from 3 to about 8 quarters). Residential investment has fallen significantly for six straight quarters. So, if this cycle follows the typical pattern, non-residential investment will start declining about now.

Due to the deep slump for CRE during the business led recession in 2001, CRE is nowhere near as overbuilt as residential - even though the CRE lending standards were very loose. Still, it appears there is a slowdown in non-residential investment starting now.

Fed Loan Survey Nonresidential Investment The second graph shows the YoY change in nonresidential structure investment (dark blue) vs. loan demand data (red) and CRE lending standards (green, inverted) from the Fed Loan survey.

The net percentage of respondents tightening lending standards for CRE has risen to 50%. (shown as negative 50% on graph).

The net percentage of respondents reporting stronger demand for CRE has fallen to negative 34.6%.

Loan demand (and changes in lending standards) lead CRE investment for an obvious reason - loans taken out today are the CRE investment in the future. This report from the Fed also suggests an imminent slowdown in CRE investment.

Data Source: Net Percentage of Domestic Respondents Reporting Stronger Demand for Commercial Real Estate Loans