Economists' Outlook

Housing stats and analysis from NAR's research experts.

Based on early estimates, economic activity closed 2012 on a mixed note. Though gross domestic product grew at 2.2 percent for the whole year, the fourth quarter results were disappointing, showing a 0.1 percent decline. A large 22.2 percent cut in defense spending at the federal level (coming after a surprisingly high defense spending growth in the prior quarter) and a large negative change in private business inventories were key reasons for the mild contraction in the economy.

The year-end brought closure to several sources of uncertainty while opening new ones. The presidential election is over and the “fiscal cliff” uncertainty was partially solved by allowing some provisions to revert to normal (the payroll tax returning to 6.2 percent), while kicking the can down the road on others (sequestration). The housing market continued to firm up nicely with housing starts recording 27 percent gain for the year while new home sales rose 20.0 percent from the prior year. Existing home sales grew by 9.0 percent during the year, with shrinking inventories driving up prices of existing homes. Rising homes prices elevated homeowners’ housing equity by $1.5 trillion over the past two years. The housing wealth gain is helping consumers to hum along at around 2 percent growth. In light of these factors, SIOR members recorded a positive fourth quarter.

Looking at the yearly economic activity as measured by gross domestic product (GDP), most major components posted positive growth. Based on the Bureau of Economic Analysis’s first estimate, both consumers and businesses increased their spending over 2012. Consumer spending rose 1.9 percent during the year, driven by a 7.8 percent rise in expenditures on durable goods. Consumers spent more in 2012 on cars (up 7.7%), furnishings and household equipment (up 5.8%), as well as recreational goods and vehicles (up 10.9%). Consumers spending on services also increased, by a more modest 1.3 percent.

Private businesses, while maintaining a cautious attitude given the uncertainties present during 2012, upped their spending by 7.7 percent over the year, the second highest annual rate since the recession. This increase was welcoming given the possibility of stalling from the fiscal cliff news headlines throughout the quarter. Spending on commercial structures rose 9.6 percent, in a positive turn for commercial real estate. Companies also spent more on equipment and software, especially transportation equipment, which increased 17.8 percent during the year. Spending on industrial equipment advanced 7.0 percent, while on information processing it grew by 3.8 percent.

The winds of international trade blew favorably for U.S. companies during 2012. Both exports and imports increased during the year, by 3.2 percent and 2.5 percent, respectively. Benefitting from a competitive exchange rate, U.S. companies increased their exports of goods by 4.0 percent and services by 1.3 percent. In addition, import of goods also rose, by 2.2 percent, providing strong demand for the industrial sector. The net exports figure was a positive $2.5 billion for the year.

Government spending declined 1.7 percent, driven by budget cuts at federal, state and local levels. At the federal level, both defense and nondefense cuts added to a 2.2 percent decrease in spending. Still working through lower revenues, state and local governments continued to slash spending by 1.3 percent.

On the employment front, despite a midyear slump, the overall picture was positive—the economy recorded a net 2.2 million new jobs, the strongest yearly growth in the past three years. Added to the totals from 2010 and 2011, there have been 4.9 million new jobs added post-recession. Given the 8.7 million jobs lost during the recession, it is obvious that we still have a large gap remaining. However, the trend is encouraging.

The forecast is for GDP growth of 2.3 percent in 2013 with another 2 million jobs added to the economy. Though improving, the sub-par recovery performance will keep the unemployment rate well above 7.0 percent throughout this year.

Commercial Real Estate

With modestly improving macroeconomic conditions, commercial markets across the country notched noticeable growth. As employment in office-centered industries continued to rise, demand for office buildings advanced. For office properties, net absorption is expected to total 33.9 million square feet this year, leading to a projected 15.9 percent vacancy rate at the close of the year. The decline in vacancy is expected to be accompanied by a 2.6 percent rise in rents.

With growing trade, demand for industrial spaces remained strong, as leasing activity increased in the fourth quarter. Absorption in the industrial sector is expected to reach 121.8 million square feet this year, resulting in a 9.5 percent vacancy rate and a 2.3 percent rent rise.

With cautious consumers keeping spending on a moderate path, the retail sector is expected to absorb a net 11.9 million square feet this year. Retail availability will likely decline to 10.6 percent for the year, and rent will rise 1.5 percent.

The apartment rental market continues to perform strongly and is expected to post good results for the year. Net absorption is expected to exceed 270,000 units this year, keeping the vacancy rate at 3.9 percent (from 5.2% in 2011). Rent is projected to rise 4.6 percent this year and an additional 4.7 percent in 2014.

For the Commercial Real Estate Outlook report, visit

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