CBRE’s Forecast in “An Inconvenient World”

Last week, I had the pleasure of meeting well-known commercial real estate economist, Ray Torto, CBRE’s Global Chief Economist when he was in Boston to speak at a NEWiRE luncheon I attended.

His title slide said it all: “An Inconvenient World.”

Fabulous presentation. Somber message. Inconvenient, indeed.


Torto’s key points were:

  • Economies globally are growing, but not fast enough for the significant job growth needed to jump start commercial real estate investment.
  • Here in the U.S., we’re down 4 million jobs, and based on average job creation of only 100,000/month, it will be 3 to 4 years before we return to pre-recession levels.
  • Expect low (i.e., below normal) global economic growth for the balance of the decade with the slowest period from now to 2015.
  • Electoral cycle and policy/political discourse portends uncertainty for at least a while as markets continue to recover.

He had an interesting analogy for the market, considering it as a hospital patient with a timeline something like this: the patient was in ICU and on the brink of death back in 2009. At the time, companies were really struggling, and some did not know if they would even survive. The “patient” then spent 2010 on the recovery floor of the hospital. Finally, in 2011 the patient was out of the hospital, but still on home care. And now, in 2012, the patient is still recovering, but not in good health yet, and not exactly ready to go out and resume running five miles a day like he did back in 2008.


Interestingly, Torto noted that for Boston in particular, money is not the issue. He has clients who “look at Boston, thinking they could afford to buy the whole place, but they only want quality assets…”, assets that will appreciate in value, properties that buyers can reasonably expect will be attractive for leasing out to tenants. That’s all his clients care about right now. In fact, they are not even looking for anything outside of gateway cities.

Reassuring was Torto’s take on the “fiscal cliff” making headlines today. If you are not familiar with the term, it refers to a number of policy changes scheduled for January 2013: Bush tax cuts expire, federal payroll taxes increase, unemployment benefits decrease and there will be mandatory spending cuts to defense and other federal programs. I was gratified to hear that Torto’s opinion is that policy makers have many tools at their disposal to stave off the wide collapse that some are predicting at the start of 2013. He feels the same about the European debt crisis. Certainly it hurts the confidence of investors, but that is the biggest toll.

Torto reminded all of us to not just focus on current market metrics, but to look at statistics over a long period of time (at least back to 2001) to keep things in perspective. Take a look at the graphs above. From the first (top right), you will see why you may be doing more environmental due diligence work on office properties in central business districts (especially in safer metros like NYC, Boston, LA and San Fran) and on multifamily properties. Core office space is the sweet spot of the market right now. People are moving into cities to live and work. That is why you see office and apartment properties in urban areas recovering faster than industrial, retail and office investment in secondary and tertiary markets. Where prices are recovering faster, investors see stronger ROI and hence, more interest in property transactions that other property types in other metros exists. From the second graph, you see that capital for property investment remains concentrated in major metros. This is why commercial real estate loan originations and environmental due diligence projects are more robust in the bigger metros across the U.S. than in the smaller suburban areas that investors view as riskier prospects.

So, overall, Torto provided justification for a conservative forecast for anyone whose business is dependent upon a healthy commercial property market. The market will lift—and it already is—but the patient needs more time to recover fully.