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Economic Environment

The U.S. economy ended 2010 with a real GDP growth rate of 2.9 percent, slightly higher than the 2.6 percent growth in 2009, according to the Bureau of Economic Analysis (BEA). Although economic growth was more sluggish than any of us hoped for the year overall, it was positive each quarter in 2010, and thus far, we have avoided the much-feared “double-dip” recession. More importantly, the economy seems to have acquired a little more steam as we move into 2011.

The Congressional Budget Office (CBO) announced that the federal budget will reach a new record of nearly $1.5 trillion, and as a share of GDP, is expected to increase to 9.8 percent in fiscal year (FY) 2011. As a percentage of economic output, the 9.8-percent deficit would be the second-largest in 65 years, behind only the 10-percent level in 2009.

According to the Bureau of Labor Statistics (BLS), the unemployment rate declined to 9.4 percent in December 2010, the lowest it has been for nearly a year and a half, but this was primarily because a record number of people stopped looking for work. Nonfarm payroll employment increased by 103,000 during the month, and although this rate of growth does not keep up with the addition of new entrants into the workforce each month, at least it is a positive number. The economy added 1.1 million jobs during the past year.

Consumers opened their pocketbooks during the 2010 holiday season, with total retail sales from October through December 2010 up 7.8 percent from the same period a year ago, according to the U.S. Census Bureau. This topped off a year of increases, with total retail sales for the entire year up 6.6 percent from 2009 figures.

What Does This Mean for Commercial Real Estate?

Commercial real estate activity was mixed during fourth quarter 2010. Top-tier properties have been selling at record-prices in some of the major markets, although there was much less sales activity in the secondary and tertiary markets. However, leasing markets exhibited increasing signs of recovery. Construction activity remains quite limited, but the bulk of new commercial real estate construction was related to healthcare, public infrastructure, and multifamily housing/apartments.

With respect to the conditions of the banks, there were 157 failed banks in 2010, more than any year since 1992, but the level of assets associated with these banks was 45.7 percent less than the assets associated with the banks that failed in 2009. Although the Federal Deposit Insurance Corporation’s (FDIC’s) list of “troubled” banks increased to 860 as of Sept. 30, 2010, the number of bank failures is expected to decline in 2011.

Credit activity was mixed across the U.S. during fourth quarter 2010, and while loan demand for commercial real estate has been stabilizing in some areas, it remained soft or has been declining in other areas.

Transaction Analysis

Real Estate Research Corporation’s (RERC’s) transaction analysis showed that total volume increased for all property types, except for the retail sector, on a 12-month trailing basis during fourth quarter 2010. However, on a quarter-to-quarter basis, total volume

increased for all property types, including retail, during fourth quarter.

The size-weighted average price per square foot/unit for the office and apartment sectors overall increased approximately 10 percent on a 12-month trailing basis, while the size-weighted average price for the retail sector decreased approximately 5 percent during fourth quarter 2010. The size-weighted average price for the industrial sector remained unchanged from the previous quarter.

RERC’s 12-month trailing weighted-average capitalization rate decreased for all property sectors during fourth quarter 2010.


• The majority of RERC’s investment survey respondents stated that distressed office properties—many of them well-located, free-standing properties—were attractively priced, selling well, and even outselling other properties. Other respondents, however, stated that the office sector was risky due to oversupply.

• Volume for the office sector increased by more than 40 percent during fourth quarter 2010 on a 12-month trailing basis, although the majority of the increase was due to sales of more than $5 million. The size-weighted average price per square foot of office space rose approximately 10 percent, while the 12-month trailing weighted-average capitalization rate declined to 6.7 percent during fourth quarter. Volume and price for transactions of less than $2 million declined.

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