A Commercial Real Estate Crisis? Probably Not

By Casey B. Mulligan
Economix — New York Times
 

Casey B. Mulligan is an economics professor at the University of Chicago. For months now, experts have been predicting that commercial real estate will be "the other shoe to drop." But in fact, non-residential building fell far behind housing construction during the housing boom. This shortage of commercial buildings relative to housing suggests that a commercial real estate crisis will not occur, or that at worst it will occur with much less severity than did the housing crash.

While there is much disagreement as to the proper remedies for the current economic situation, there is wide agreement that the housing boom and crash that followed were the major factor in putting us where we are today. These days, "real estate" is a term that provokes fear, not optimism. Nevertheless, it is a mistake to assume that commercial real estate shares the housing sector's ailments.

The chart below shows the inventory of housing and non-residential structures in place in America. The figures are for the beginning of each year, relative to the 1990-2000 trend. By the beginning of 2007, the amount of housing — that is, square footage adjusted for quality — was 3.5 percent above that previous trend. The number of non-residential structures was 2.0 percent below trend.

Source: Casey B. Mulligan; Bureau of Economic Analysis

We all know that there is a nationwide surplus of housing. But there is little if any nationwide surplus of non-residential buildings.

Business conditions have deteriorated recently, so it might seem that even a normal amount of commercial real estate would be too much these days. However, we probably ended the housing boom with enough of a commercial real estate shortage that economic activity could "back up" a bit toward the amount of commercial real estate.

For example, the chart suggests that non-residential inventory is now about 2 percent below trend. Employment has fallen about 2 percent so far during this recession. Inflation-adjusted gross domestic product is down 1 percent in the last six months, and down about 0.2 percent for the recession as a whole. Thus the real G.D.P. and employment shortfalls so far are in line with the relatively small amounts of non-residential inventory.

I continue to watch the economy in 2009 but, barring a significant further decline in business activity, I do not expect to see a nationwide surplus of commercial real estate and therefore do not expect to see commercial real estate suffer the kind of crisis that followed from the housing surplus.