Commercial Markets Remain Weak in Third Quarter 2011

Heading into the traditional holiday season, the economy is looking for some sparkle. While the third quarter brought some positive news, it does not add up to a bountiful season. With unemployment still high, and European issues continuing to weigh on financial markets, economic concerns slowed commercial real estate markets.

Gross domestic product (GDP) rose 2.0 percent in the third quarter. Mirroring the second quarter’s patterns, all major components advanced, except government spending. Business investments provided a double-digit boost behind the economic advance, as businesses upped their spending on equipment—transportation was up 31.7 percent while industrial equipment rose 31.6 percent—and real estate (up 12.6 percent).

Meanwhile, consumer spending remained steady, gaining 2.3 percent during the third quarter. While at modest levels, consumers increased their spending on both goods and services. Spending on furnishings and household equipment was up 5.3 percent, while consumption of recreational goods and vehicles rose 10.8 percent. Cars and auto parts registered a 1.9 percent rise. Consumers also increased their spending on financial services and insurance (2.4%), recreation (2.8%) and health care (5.5%).

International trade, which has proven resilient this year, continued to expand during the quarter. With exports rising by 4.3 percent and imports growing by 0.5 percent, the balance of trade was positive. However, along with growth in trade, prices of exchanged goods also increased. Import prices, in particular, have been growing at double-digit rates for better part of 2011, with September’s prices 13.4 percent higher year-over-year. Export prices rose at a much slower pace, with September 2011 figures up 9.5 percent from the prior year.

The other major contributor to economic growth—government spending—was flat. Federal spending increased 1.9 percent, driven by defense expenditures, up 4.7 percent. State and local governments slashed their spending by 1.4 percent as they continued to face mounting deficits.

Commercial real estate in REALTOR® markets remains hampered by tight financing and slow activity. Based on the results of the November Commercial Real Estate Market Survey, the overall market activity contracted in the third quarter. On the leasing side, activity declined 2.0 percent over the previous quarter. Vacancies remained elevated, as underscored by the 7.0 percent decline in rents and the 2.0 percent rise in concessions. Vacancy rates are still in the double-digits for all property types, except multifamily. The majority of respondents found tenants continuing to look for smaller commercial spaces—mostly under 5,000 square feet.

Investment sales declined 6.0 percent from the first quarter, as 34.0 percent of REALTORS® reported no sales transactions during the second quarter. Sales were virtually flat compared with a year ago—down 0.2 percent. Prices also declined, by 8.0 percent compared with the first quarter, while cap rates moved up three basis points. The majority of sales (79%) were below $1.0 million, while the average transaction price was $1.1 million. Commercial practitioners continue to find financing as the top obstacle in closing deals, followed by the national economy.

For the full report along with regional details, please visit the Commercial Real Estate Market Survey page on

George Ratiu, Director, Quantitative and Commercial Research

George Ratiu, Research Economist, writes regular economic columns and conducts research in the areas of commercial real estate, international investments, mortgage performance and foreclosures. He produces NAR’s Commercial Real Estate Outlook and manages quantitative surveys, including the Commercial Real Estate Quarterly Market Survey.

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