The Recession and its Effect on Commercial Real Estate

Let us remember the "R" word has an identifiable description, which is "Two consecutive negative quarters of gross domestic product (GDP)." The acceptable definition of GDP is as follows: The value of all goods and services produced in a country for a one-year period. This compares with the previously used gross national product (GNP). The GNP includes the earning of American citizens in other countries. The GDP presents a clearer financial picture for our country.

For the years 2005, 2006 and 2007, the GDP increased 3.1%, 2.9% and 2.2% respectively. The last quarter of 2007, the GDP increased .06 percent. The GDP is a lagging indicator. It tells you what has passed. Another major lagging indicator is the unemployment rate, which also happens after the fact. When you combine the trends of these two lagging indicators with a critical leading indicator, you get a good picture of where the economy is currently, and where it's going.

The single largest influence on the GDP is consumer spending. Consumer spending accounts for 70% of the GDP. The key determinant for consumer spending is the confidence level. The Conference Board, a New York-based industry group, produces the oldest and most widely accepted consumer confidence index (CCI).

The Conference Board Consumer Confidence Index, which had declined sharply in February, fell further in March. The Index now stands at 64.5 (1985=100), down from 76.4 in February and significantly short of the 73.5 reading that many economists had been anticipating. The March Conference Board numbers suggest that household spending will probably drop sharply in coming months.The Federal Reserve's interest rate cuts are losing the battle. They are not offsetting the higher pump prices, declining real estate prices, a weakening economy, and increasing unemployment (when you account for the designation not in the labor force).

Quantifying a recession and the affect on commercial real estate

Credit: spike

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