A good indicator

Changes in the commercial property market are a good forecaster of economic trends.

Capital expenditures are a driving force in the economy, and commercial property prices are a good predictor of such pending events. So, for example, in Manhattan the construction of the Woolworth building, then the tallest structure, began in 1910 just as the severe economic panic of 1907 began.

In 1929 the Chrysler building was started. It was the highest commercial structure at that time. It was completed as the Depression appeared. Likewise in the 1930s the Empire State building was under construction, and it was completed as the 1930s business collapse took hold.

Then too, in the United Arab Emirates, a site of luxury buyers, the world’s tallest residential structure has just been completed, but a backlog of demand persists.

In Europe approximately $140 billion in commercial real estate transactions took place last year, but now that continent is mired in a deep depression. It is not astonishing that builders have been so enthusiastic about commercial property development, higher by 15 per cent last year, which passed the 2000 boom, as interest rates fell to multi-generational lows, with prime rates hovering around one per cent.

Nevertheless, the yields on such properties have been falling, but still they permit builders to earn a respectable profit.

Given this situation, is the real estate market overblown? It does not appear to be the case right now. That will take place when a downtrend in the overall economy adversely affects demand, when interest rates move higher or a burst of speculative building leads to an oversupply.

A rise in interest rates will not become evident soon, as central banks in Europe continue to lower interest rates and in the United States any increase in interest rates does not appear likely to occur immediately. With inflation remaining subdued, interest rates improbably will start to climb soon.

While building cranes scatter over the landscape, still demand continues. In Toronto, for instance, some new condos are built that provide only 500 square feet per tenant. Overhead cranes should entail concerns of building, but not just right now.

It would be prudent to keep a sharp lookout on skyscraper building that in the past has been a precursor of the end of the commercial building boom and the overall economic cycle.

That will make it clear when it is time to worry.



Bruce Whitestone