Economy Watch: CRE Growing, But Still Below Historic Levels

By Dees Stribling, Contributing Editor

Following the Bureau of Economic Analysis’ report on U.S. GDP in the third quarter last week, the bureau also released data on commercial real estate as a component of the overall economy. The numbers point to two conclusions. First, CRE is still on the mend, with investment and spending in the sector rising. Second, CRE hasn’t recovered to historic norms as a percentage of GDP, much less reached the high levels of the mid-2000s. That actually might be a good thing, since those levels represented an unsustainable boom, egged on by the bubble in residential real estate. CRE was never as bubbly as residential, but it nevertheless rose fast in the mid-2000s and collapsed even faster after 2008.

By the BEA’s reckoning, the office sector as a percentage of the economy has long been the largest share among commercial properties. As of the third quarter of 2015, office represented 0.3 percent of GDP. In the years after the Great Recession, office dipped below 0.2 percent of GDP, so the sector is decidely improving as the demand for office space improves in many markets (such as the heated markets of Seattle or Denver). Even so, office has been at least 0.3 percent and usually higher historically, reaching nearly 0.9 percent during the 1980s boom.

The retail sector is only a little larger as a percentage of GDP now than it was right after the recession. As if 3Q 2015, retail managed to be just over 0.1 percent of GDP. Historically, twice that much — 0.2 percent — has been more common. Demand for retail properties hasn’t yet caught up to the supply generated duing the mid-2000s boom, so it’s not likely the percentage of GDP will expand more rapidly in the years ahead, because the outlook for demand is still cloudy. After all, consumers are still uncertain in their outlook. At the end of last week, the final University of Michigan consumer sentiment index for October came in at 90.0, down from the preliminary reading of 92.1, though up from 87.2 at the end of September.

The hospitality sector likewise took a major hit in the recession, dropping to below 0.1 percent of GDP in the few years after 2008. But its recover seems more robust than the retail sector, having already returned to about 0.15 percent, which is close to the sector’s historic norms. That’s because demand for hotel development is back, and for good reason. According to STR, as of the week ending October 24, average U.S. hotel occupancy increased 1.7 percentage points year-over-year to 70.6 percent, and average daily rates and RevPAR were likewise up since last year. In face, 2015 might be a record year for the industry in terms of occupancy.