Economic Indicators Predict Real Estate Demand

The NAIOP (Commercial Real Estate Development Association) Research Foundation has just released two reports that examine national and metro predictors of commercial real estate development and provide economic variables that drive real estate demand. Office stock growth has been cyclical, growing at an annual rate as high as 8 percent in the early 1980s to as low as 0.25 percent in the early 1990s, according to one of the reports, “National Predictors of Commercial Real Estate Development.” According to the same report, retail stock’s growth range has been 4.5 percent to 1.5 percent.

The economic variables studied in the report yield varying results in their ability to predict development of commercial properties. The researchers found that peaks and bottoms in completions tended to happen earlier in apartment and warehouses than in office and retail spaces, which could be due to a shorter development time for building completion. And, although not having a consistent lag time between peaks and bottoms in each cycle, employment growth appears to lead to increases in completions of several property types two to four years later.

The second study, “Metropolitan Predictors of Commercial Real Estate Developments,” which looks closely at new development in individual metropolitan statistical areas (MSA), found:

• Overall, employment growth in the various economic base industries yielded the highest correlations with office and warehouse stock growth, and less so with apartment and retail stock growth.
• Of the five strongest economic indicators, the local population of 25 to 34 year olds yielded the highest correlations with commercial stock growth (mainly office, warehouse, and apartment) across all MSAs.

Results show that it may be that the space must be completed before the employees can be hired and that is why employment growth does not lead supply growth in some MSAs.