Economy slows, but CRE fundamentals stay healthy.


Commercial real estate (CRE) fundamentals continue to improve, despite slowing activity in the larger economy, reported Wells Fargo Securities, Charlotte, North Carolina.

The Commerce Department reported on May 29 that gross domestic product (GDP) shrank at an 0.7 percent annual rate in the first quarter.

"The buzzword to understand why economic growth has deviated from its long-run trend in recent quarters is 'transitory,'" said Wells Fargo Securities Senior Economist Anika Khan. She said short-term factors including harsh winter weather and West Coast port disruptions, along with less-temporary shocks such as falling oil prices and a strengthening U.S. dollar, weighed down economic growth--but she offered several reasons for commercial real estate investment optimism.

"Property fundamentals continue to be buttressed by underlying improvement in the labor market," Khan said in Wells Fargo Securities' first-quarter Chartbook report. "With resource slack projected to continue to diminish this year, we expect demand to remain healthy across all property types," she stated in the report.

In addition, commercial real estate values continue to rise. Khan said the Moody's/Real Calital Analytics (RCA) Commercial Property Price Index reached its highest level in March since the series began in 2000. "Much of the surge continues to be driven by an increase in major markets, which has now doubled since hitting a cycle low in early 2010," she said.

In fact, with major-market valuations above peak levels, many investors now prefer secondary...

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