NAR Leading Index For Commercial Real Estate Rises in First Quarter

WASHINGTON (May 23, 2006) – A leading indicator for the commercial real estate market shows commercial sectors will continue to improve during the balance of the year, according to the National Association of Realtors®(NAR).

During the first quarter, the Commercial Leading Indicator for Brokerage Activity* was at an index of 118.9, rising 0.8 percent from an upwardly revised reading of 118.0 in the fourth quarter; the index is 2.7 percent higher than the first quarter of 2005 when it stood at 115.7. The first quarter index marked four straight quarters of growth, with improvement seen in 10 of the last 11 quarters.

David Lereah, NAR’s chief economist, said an increase in commercial brokerage activity can be expected over the next six to nine months. “The commercial leading indicator affirms a national trend for additional strengthening in commercial real estate sectors with absorption of space outpacing the level of new space coming on line,” Lereah said. “This helps to explain a record flow of funds into commercial real estate last year, with more investors embracing the advantages of diversifying in this sector.”

The Commercial Leading Indicator for Brokerage Activity is a tool to assess market behavior in the major commercial real estate sectors. The index incorporates 13 variables that reflect future commercial real estate activity, weighted appropriately to produce a single indicator of future market performance, and is designed to provide early signals of turning points between expansions and slowdowns in commercial real estate.

The first quarter index suggests net absorption of space in the industrial and office sectors will improve for the balance of 2006. At the same time, overall completion of retail, office, warehouse and lodging structures is expected to grow.

Net absorption in the office and industrial sectors in the fourth quarter is projected to be 135 to 155 million square feet. About $284.5 billion in additional commercial construction is expected in the fourth quarter, an increase of $17.4 billion above the $267.1 billion recorded in the first quarter.

The 13 series in the index include industrial production, the REIT (real estate investment trust) price index, NCREIF (National Council of Real Estate Investment Fiduciaries) total return, personal income minus transfer payments, jobs in financial activities, jobs in professional business service, jobs in temporary help, jobs in retail trade, jobs in wholesale trade, initial claims for unemployment insurance, manufacturers’ durable goods shipment, wholesale merchant sales, and retail sales and food service.

More than 100,000 NAR members offer some level of commercial service, with 57,000 specializing primarily in the commercial real estate market.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

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*NAR reviewed a wide variety of indicators, examined the relationships of indicators that demonstrated a historical impact on commercial real estate, and modeled a forward looking index based on historic trends. Although individual indicators sometimes move in opposite directions, together they offer a better indication of future market activity.

Quarterly data for 13 selected series were reviewed back through the first quarter of 1990 (table attached). The modeling demonstrated a change in commercial brokerage activity that could be seen two quarters later as measured by net absorption in the industrial and office sectors, and the value of building construction put-in-place on completion of retail, office, warehouse and lodging structures. An index of 100 is defined as the level of commercial real estate market activity during the first quarter of 1990, the first period to be analyzed.

The next commercial real estate market forecast is scheduled for release on June 13, and the next commercial indicator index will be released August 21.

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