Area Development
Source: Wells Fargo Securities Economics Group

Searching for Certainty in an Uncertain World
The U.S. economy continues to bounce from event to event with seemingly little change to its underlying momentum. The presidential election produced no significant net change on the policy front. President Obama was re-elected and congress remains divided, with Republicans controlling the House and Democrats controlling the Senate by similar majorities to what they had prior to the election. The financial markets reacted negatively to the result, however, as it suggests the resolution of the fiscal cliff will be no easier than it was previously. The stock market’s instant reaction also meant that attention shifted to the fiscal cliff immediately, which means getting the presidential election behind us increased the general anxiety level rather than reduce it. Europe’s ongoing financial crisis and recession is also weighing on economic growth.

Our forecast calls for real GDP growth to slow to a 1 percent pace or less during the final quarter of 2012 and the first half of 2013. The slowdown is primarily due to increased uncertainty, which has caused businesses, both large and small, to put off key decisions on capital spending and hiring. What little strength is present in the economy appears to be broadening. Residential construction is one clear area of improvement, and gains in homebuilding should ultimately follow through to commercial construction as well. A resolution to the fiscal cliff, even one that is less than optimal, should also provide a sense of relief for businesses and households and may unleash a short-term boost to investment, hiring and consumer spending.

The sluggish economic recovery has kept commercial real estate in the slow lane. All property types have seen some improvement, thanks mostly to record low levels of new construction. Apartments have seen the greatest improvement, benefiting from increased household formations and tighter mortgage underwriting standards. Warehouse and industrial markets have also seen demand improve. Vacancy rates have improved much less in the office and retail sectors.

CRE Property Fundamentals

Commercial Real Estate - Percent, Dollars per Square Foot