HERNDON, Va., May 20, 2009 – The NAIOP Research Foundation released two reports that examine national and metro predictors of commercial real estate development and provide key macro economic variables that historically drive real estate demand.

The reports were sponsored by the Foundation and prepared by Glenn R. Mueller, Ph.D., University of Denver, and Andrew G. Mueller, Ph.D. Candidate, Colorado State University. Both of the full reports, and a collective executive summary document, are available for complimentary download at www.naioprf.org.

National Predictors
The intent of the first study, National Predictors of Commercial Real Estate Development, was to determine if there are specific economic indicators that would reliably predict commercial real estate development in the four major commercial property types - office, warehouse, retail and apartments - at the national level. Economic data was collected from various government and private sources and has provided a relatively broad sampling of more than 50 available economic variables that might logically predict commercial real estate development.

Results found that office stock growth has been cyclical, growing at an annual rate as high as 8 percent in the early 1980s to as low as 0.25 percent in the early 1990s. Warehouse stock has grown from a high of 6 percent to a low of 0.5 percent; retail stock's growth range has been 4.5 percent to 1.5 percent; and apartments' growth range has been 4.2 percent to 0.1 percent. Theoretically these cyclical growth patterns for the property types follow major economic cycles.

The economic variables studied in the report yield varying results in their ability to predict development of commercial properties. Through both visual and statistical analysis of the relationships between economic indicators and commercial stock growth, it is likely that some of the economic indicators in this study will provide good insight into the future development of commercial properties, according to the researchers.

The visual analysis of real estate completions showed the cyclical nature of development, with all four property types' completions peaking in 1986-1987 and 2001, and bottoming between 1993-1994 and 2005. The researchers found that peaks and bottoms in completions tended to happen earlier in apartment and warehouse than in office and retail, which could be due to a shorter development time for apartment and warehouse completion. It does appear that developers are reacting to positive economic indicators in unison in all four property types.

Peaks and troughs for the economic indicator employment growth consistently occur before the peaks and troughs for completions of the three commercial property types. Although not having a consistent lag time between peaks and bottoms in each cycle, employment growth appears to lead to increases in completions of the three property types two to four years later.

Metropolitan Predictors
The second study, Metropolitan Predictors of Commercial Real Estate Development, follows the study on national economic indicators of real estate development by looking at new development in individual metropolitan statistical areas (MSA).

The study groups MSAs by similar economic base industries and analyzes whether the available local economic indicators are highly correlated with the local development growth for city groups over time. The analysis of MSAs with the same economic base industries yields some insight into the drivers of commercial stock growth across these MSAs.

• Overall, employment growth in the various economic base industries yielded the highest correlations with office and warehouse stock growth, and less so with apartment and retail stock growth.
• Of the five strongest economic indicators, the local population age cohort of 25 to 34 year olds yielded the highest correlations with commercial stock growth (mainly office, warehouse and apartment) across all MSAs.
• In some cases, gross metro product and population growth also yielded high correlations, indicating that these economic indicators may be leading or coincident indicators of new commercial stock growth in many MSAs.

In regards to economic base industry stock growth correlations, the study shows the average correlation of stock growth in the four property types across MSAs with similar economic base industries. This analysis is helpful in determining if development in MSAs with the same economic base industry trend together, and if certain industries have commercial stock growth that is more highly correlated than others. Findings show that:

• Natural resources and mining economic base MSAs have the highest average correlation in commercial stock growth from 1980 to 2008, with professional and business services MSAs coming in second.
• Warehouse stock growth also has the highest average correlation amongst MSAs with professional and business services as an economic base industry.
• Stock growth in apartments is most highly correlated among MSAs with professional and business services economic bases, followed by trade, transportation and utilities.

Only after assessing all MSAs individually and all the economic indicators available at the local level for each city could a complete picture of what drives real estate development in each MSA be identified. According to the researchers, each MSA has its own unique attributes and combinations of dominant economic base industries that should be analyzed when doing a development forecast. Some economic variables lead to new supply in certain cities while others seem to move in concert with new supply.

Results show that it may be that the space must be completed before the employees can be hired and that is why employment growth does not lead supply growth in some MSAs. The researchers' hypothesis is that the economic indicators that are best at predicting commercial real estate development will be slightly different for each MSA, but that the several indicators that were significant in the study are a good start at developing metropolitan level models of commercial real estate growth.

About the NAIOP Research Foundation:

The NAIOP Research Foundation was established in 2000 as a 501(c)(3) organization to support the work of individuals and organizations engaged in real estate development, investment and operations. The Foundation's core purpose is to provide these individuals and organizations with the highest level of research information on how real properties, especially office, industrial and mixed-use properties, impact and benefit communities throughout North America. For more information on how to contribute or for complimentary research reports, visit www.naioprf.org.

About NAIOP:

NAIOP, the Commercial Real Estate Development Association, is the leading organization for developers, owners and related professionals in office, industrial and mixed-use real estate. NAIOP comprises 15,000 members in North America. NAIOP advances responsible commercial real estate development and advocates for effective public policy. For more information, visit www.naiop.org.