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Saturday, January 03, 2009

Non-Residential Structure Investment vs.Residential Investment

by Calculated Risk on 1/03/2009 07:33:00 PM

From the AP: Commercial real estate in for tough 2009

[T]he welfare of commercial real estate trails the rest of the economy, so landlords might not get any relief for another two years.

"If the economy recovers late this year," said Robert Bach, chief economist at Grubb and Ellis Co. "Our industry will still have a ways to go before it will recover."
There is much more in the AP article on CRE, but I'd like to focus on the excerpt.

Typically non-residential investment in structures trails residential investment by about 5 quarters.

Lodging Investment as Percent of GDP Click on graph for larger image in new window.

The first graph shows the year-over-year (YoY) change in residential investment (shifted 5 quarters into the future) and the YoY change for non-residential structures.

Although a 5 quarter lag is the best fit, non-residential investment typically trails residential investment by 3 to 8 quarters.

Lodging Investment as Percent of GDP The second graph shows the correlation coefficient for different lags (zero quarters to an 8 quarter lag).

Because of this historical relationship, I expected a non-residential investment bust starting at the end of 2007 or in early 2008. Instead non-residential investment in structures is only now turning negative - a lag of over 10 quarters following residential investment.

This suggests that the recovery might be more sluggish than Robert Bach, the chief economist at Grubb and Ellis Co. expects. Instead of two years, I think the CRE slump will probably be longer.