The Federal Reserve released its quarterly summary of economic projections last week, reducing its forecast of GDP and raising its forecast of the unemployment rate in 2011 and 2012. In doing so, the Fed acknowledged what many private economists have been saying for several months – that the pace of the recovery has slowed this year. The Fed's previous GDP forecast range of 3.1 to 3.3 percent for 2011 was reduced to a range of 2.7 to 2.9 percent, and the previous unemployment range of 8.4 to 8.7 percent for the fourth quarter of 2011 was raised to a range of 8.6 to 8.9 percent. Forecasts for 2012 were downgraded as well. While acknowledging the recent spike in inflation, the Fed believes that inflation will remain at or below its target range of 1.5 to 2.0 percent through at least 2013. Fed Chairman Bernanke said in his press conference last week that temporary factors such as high oil prices and supply chain disruptions related to the disasters in Japan are depressing output, but other, longer-lasting factors could be at play, too. Such factors could include the failure of the housing market to stabilize, reduced bank lending and persistently high levels of consumer and government debt. For commercial real estate, this economic scenario would translate into continued sluggish leasing activity with the exception of apartments and hotels. Although investors have begun targeting riskier assets this year, i.e. non-core properties and properties in secondary markets, the slow leasing market recovery could delay broader interest in value-add and opportunistic properties, where success requires strong leasing demand and rising rental rates for higher quality properties.
Sources: BEA, Federal Reserve, Grubb & Ellis