TD Economics Forecasts Continued CRE Growth Despite Economic Concerns

The ongoing housing recovery bodes well for the future of commercial real estate (CRE), ""TD Economics"":http://www.td.com/economics/analysis/economics-index.jsp (an affiliate of TD Bank) says in a recent ""report"":http://www.td.com/document/PDF/economics/special/USCommercialRealEstate.pdf.

[IMAGE]

Despite challenges--including gradually rising interest rates and government spending cuts due to sequestration--TD holds a generally positive outlook for CRE, citing promising economic growth and accelerated demand.

""The key difference between the initial recovery in commercial real estate and future growth will be the contribution of interest rates,"" said James Marple, senior economist at TD and author of the study. ""As interest rates rise, the spread between commercial real estate yields and government Treasuries will narrow. Prospects for price growth will then depend on improving economic fundamentals.""

With projected economic growth of 1.9 percent in 2013 and 2.8 percent in 2014, TD expects the job market to expand by nearly 4.8 million over the next two years, thus bringing up the need for more CRE space.

While the sequester will act as a drag on the economy, fiscal austerity is also expected to reduce the risk of a major spike in interest rates that would set back the housing and CRE recoveries, TD asserts.

""Rising interest rates are manageable as long as they are caused by faster economic growth. This is exactly what we anticipate,"" Marple said.

Taking a closer look at CRE categories, TD believes government cutbacks will prove ""a particular challenge"" for the office segment, which has both direct and indirect exposure to that sector. However, scientific and technical services are expected to boost office employment and drive demand for space.

The retail sector, meanwhile, is expected to see its fortunes rise as housing completes its rebound.

At the same time, the ""onshoring"" trend in manufacturing--driven in part by low energy costs due to the increased popularity of shale gas--will increase demand for industrial space, particularly in coastal markets more exposed to foreign trade. Finally, the apartment sector will see continued demand from renter households to support construction growth.

TD's study follows a ""report"":https://themreport.com/articles/cbre-group-reports-continued-growth-in-commercial-real-estate-2013-04-08 from ""CBRE Group"":http://www.cbre.com/EN/Pages/Home.aspx showing ongoing improvements in CRE vacancy rates.