Slow Going in the Economy

The latest data suggest slow going in the economy, although prospects for a double-dip recession remain unlikely, according to Calvin Schnure, NAREIT vice president of research and industry information.

"The latest economic news has been fairly disappointing," Schnure said. He cited the recent retail sales report that showed a 0.5 percent decline and slower than expected hiring numbers in the latest jobs report as evidence of the ongoing softness in the economy. Schnure said the signs all point to economic growth remaining tepid in the coming months and possibly through the end of the year.

Schnure said the current uncertainty in the economic picture is preventing him from ruling out the possibility of a double-dip recession in the light of the potential shocks to the economy. However, he did downplay the likelihood.

"If you look at the history of business cycles and you pay attention to the cyclical versus the non-cyclical parts of GDP, it tells a really interesting story," Schnure said. Cyclical components show dramatic fluctuation and include factors such as inventories, durable goods, construction spending and capital spending on industrial equipment. Non-cyclical components include factors such as non-durable spending, services and government spending.

Schnure noted that non-cyclical spending didn't fall significantly in the recent recession.

"If we're going to have another recession, you're going to see a sharp fall in the cyclical component," he said. "Recessions normally start when the cyclical share of GDP is above its long-term trend. Before we went into this most recent recession, it was considerably above the long-term trend, and it fell."

Schnure pointed out that cyclical spending has only grown to approximately half of its long-term trend: "The cyclical spending is already quire lean."

Even though the economy might avoid a recession, though, economic growth should remain sluggish going forward, according to Schnure.

Regarding REITs' outperformance of the broader market, Schnure said the "global concerns" affecting the rest of the economy, such as problems in Europe and China, don't have as much influence over REITs. Schnure also explained that new construction spending fell dramatically at the start of the recession and has just started to grow.

"The new supply of commercial real estate space is very low, so even if the economy is growing very slowly, the new supply is growing even less," he said. "What the markets are doing is realizing that as the economy avoids a recession and gets back on its feet, the commercial property sector is going to be well-positioned to participate in the recovery."