From the desk of Scott R. Little, SBA 504 Lender, Conestoga Bank:

In the world of economic forecasting, what goes down, eventually goes back up, and according to Albert “Chip” Hughes, slow, steady economic growth is exactly what he is predicting in 2012 for the commercial real estate industry.  Hughes, owner of A.R. Hughes Appraisals in Philadelphia and Washington D.C., was the guest speaker at a recent meeting of the Commercial Real Estate Network & Education (CRENE) to discuss trends in the industry in the greater Philadelphia market.   “To gauge what’s going to happen with commercial real estate in the foreseeable future, you need to concentrate ofn the prime factors that generate demand, that being population and employment  growth,” says Hughes.

Hughes explained to the group that residential housing was the worst offender of all asset classes in the real estate downturn, but that sector appears to be stabilizing.  For the balance of commercial asset classes,  he showed that supply and demand are more closely aligned than they have been over the last four years and that this indicates a potential increase in asset values in the intermediate future.

Regarding employment, the U.S. hit the highest “official” unemployment rate in October 2010 of 10.1%, with current employment in the 8.6% ranges.  More important, according to Hughes, is the participation rate of the labor force, or the number of the population who will continue to work.  As older Americans are laid off and experience chronic unemployment, they often end up retired, and no longer participating in the workforce.  Despite a reduction in the office unemployment rate, the U.S. will have fewer overall workers to fill up empty space.

And what about government vs private sector jobs?   Contrary to public opinion, government jobs have continued to go down, shedding 23,000 jobs per month since 2009, as private sector jobs have increased.  Office vacancy rates have dipped slightly since their overall highs in 2010 of 13% and are now in the 12% range and decreasing.

So what does housing and employment have to do with Commercial Real Estate in Philadelphia?  If more renters purchase homes in 2012, how will that impact the multi-family market?     Based on his analysis of the trend, Hughes predicts that multi-family has exhausted this latest up leg and is poised for stabilization, if not a pullback, should borrowing rates start to increase or “for sale” housing starts picking up.  “5% cap rates are unsustainable over the long term”, says Hughes.

Less obvious is the impact that employment levels will have on the Commercial Real Estate market.  Philadelphia had relatively low office sector job losses during the downturn compared to other major metropolitan areas, at -4.80.  But will an increasing workforce translate into more occupied office space?

Hughes concluded his presentation emphasizing that the trends were no longer declining and that statistically it looks like there is pent up demand in both housing and Commercial Real Estate.  The real challenge will be for the economy to avoid getting run over by any one of a number of buses, be they a Housing double dip, a further decline in Labor Force Participation or a Euro zone worst case scenario,  any one of which, could derail what appears to be the start of a sutainable recovery.

Hughes is available to speak to business groups and can be reached through the www.CRENE.org website.