But the economy is looking decidedly rosier since the fall of 2003. Virtually every one of the most significant economic indicators points to improving conditions. Factory orders, industrial production, business capital spending, consumer confidence, personal income, retail sales and – most importantly for real estate – job creation are up, reflecting third quarter gross domestic product that expanded by a stunning 8.2 percent annualized rate, the strongest pace in nearly 20 years. This comes as no surprise considering the massive amount of fiscal and monetary stimulus implemented by the Federal Reserve, the Bush administration and Congress to ensure that the economy does not slip into a debilitating cycle of deflation as Japan endured through the 1990s. Generous business and personal tax cuts, interest rates at 40-year lows and government spending on everything from the war in Iraq to a Medicare drug benefit have shocked the economy out of its torpor.
The coming year should bring a healthy expansion accompanied by job creation in the range of 100,000 to200,000 per month, enough to bring down the unemployment rate slowly and spur leasing activity in commercial real estate. A property valuation Interest rates will rise moderately with 10-year Treasuries ending 2004 at around 5 percent, up from the low 4 percent range where they have hovered through the fall of 2003.
The housing market is likely to cool, but the improving demand for labour should maintain a floor under the market. Investor demand for real estate may cool as well, but institutional investors and others less dependent on leverage will replace private investors at the table. A manageable increase in loan delinquencies and defaults should result in some distressed sales, creating an opening for value-added investors who have been waiting in the wings. Leasing for all types of commercial real estate should increase moderately, launching the office and industrial markets into what is likely to be a protracted recovery phase as demand slowly eats into the multi-year supply of excess space.