Paula C. Squires
Economists are expecting slow, steady growth in the U. S over the next two years, with low inflation, which means the commercial real estate recovery will remain sluggish. That was the overall theme of a 2012 economic forecast shared Thursday by Robert “Bob” Bach, a senior vice president and chief economist for Grubb & Ellis in Indianapolis. Bach was in Richmond as the keynote speaker during an annual breakfast sponsored by the Virginia Commonwealth University Real Estate Circle of Excellence at Willow Oaks Country Club.
The event drew about 125 people who were invited to participate with Bach during his speech by sharing their opinions via technology. Using small clickers placed on their tables, the audience weighed in on such topics as: Do you expect a recession in 2012/2013? The responses were: no, 65 percent; yes, 13 percent; not sure, 22 percent.
Bach said the expectations track with the consensus of economists who are looking for an annual growth rate this year of 2 percent to 2.5 percent, with inflation of 2 percent to 2.3 percent. However, there is one wildcard: volatile gas prices. “If the situation with Iran gets inflamed, there’s no telling what might happen,” Bach said, referring to growing mid-East tensions with Iran. In an interview later, Bach told Virginia Business that he considered gasoline prices the greatest threat to the country’s slow-recovering economy. “If they get up to $5 a gallon and stay there, that could have an impact on consumer spending, which represents about 7 percent of the gross national product,” he said.
Job growth is a key indicator for economic growth. Bach said Grubb & Ellis is forecasting 1.5 million new payroll jobs in 2012 and 1.8 million in 2013. In this area, Richmond has not stacked up well with other metro areas, he added. In fact, in some surveys Richmond is viewed as an “at risk” area, he said, because employment has leveled out. From December 2010 through December 2011, job growth in the Richmond metro area was 0.4 percent, compared to a national average of 1.6 percent.
The labor market is recovering more quickly in Northern Virginia, he added, although those gains might be reduced when government budget deficit reductions began to kick in. Northern Virginia has recovered 100 percent from job losses since the recession whereas Richmond has recovered 27 percent of the jobs lost, he said. The U.S. overall economy has recovered only about one-third of the jobs.
Moving to specific market sectors, Grubb & Ellis expects the national office vacancy rate to be 16 percent in 2012, down from 17.3 percent in 2011. Office vacancy in Richmond is expected to be about 20 percent his year, he said. That’s about middle-of-the pack when compared to other metros around the country. “The market here is still soft,” Bach said, “but the overall trend is for a gradual tightening over the next two years.”
Since the 2007-2008 recession, the industrial and multifamily sectors have been the industry’s strongest performers. “Industrial has done surprisingly well,” Bach said, as manufacturers restocked inventories and looked for greater efficiencies in supply chains. Grubb & Ellis expects a 5 percent increase in warehouse space in 2012. Currently, Richmond’s industrial vacancy rate is about 10 percent, which is a little above average, he said.
Sales have bounced back in retail, helping that sector. Meanwhile, apartments continue to outshine all other sectors, because of a decline in home ownership rates, Bach said, and a growth in the 20-to 34-age group. The national vacancy rate for apartments was 5.3 percent in 2012, and is expected to drop to 4.9 percent this year, Bach said.
Despite commercial real estate’s slow gains, it continues to outperform stocks and bonds as an investment, noted Bach. The story line is that “we’ve come out of this like a rose…. Broadly, the industry is doing better than it was three years ago.”
Yet, the same technology that allowed people to participate in Bach’s presentation may be hurting the market’s recovery. Asked by someone in the audience about what impact technology is having on the retail and office markets, Bach said, “People working from home and shopping online, it plays a role at the margins ... It’s having an impact because we’re seeing fewer private offices and more instances of shared office space.”
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