With the economy showing traction and moving toward a solid recovery, Real Estate Research Corporation (RERC), Torto Wheaton Research (TWR), and Principal Real Estate Investors offer possible projections for the economy and the effects it could have on commercial real estate.

The trio forecasted the most likely economic recovery scenario would be extended jobless recovery with a GDP growth of 3 percent to 4 percent. Based on the forecast, the least-likely scenario is a negative economic shock where an unforeseen event could send the recovery back into recession, coupled by a negative-to-low GDP growth.

Forecasting Economic Recovery Scenarios
	Negative Economic Shock	Extended Jobless Recovery	Traditional Economic Recovery
Description	Unforeseen event tips the balance of the recovery back to recession	Strong growth in GDP with continued very strong productivity growth results in low-to-moderate job growth	Very strong growth in GDP with moderate productivity growth results in strong job growth
Probability	5%	60%	35%
GDP	Negative to low GDP growth	GDP growth of 3–4%	Growth well above 4%
Job Growth	Negative job growth	Only gradual improvement in employment, returns to previous peak levels by mid to late 2005	Jobs recover quickly to previous peaks by late 2004
Consumer Spending	Job losses cause consumers to cave	Continued solid spending	Consumer spending accelerates
Business Expansion	Businesses slip back into cost cutting, continue to suffer from a lack of pricing power	Businesses expand only cautiously and limited pricing power	Business investment returns to previous highs
Inflation	Disinflation or deflationary environment	Near-stable inflation rates	Inflation starts gradual climb
Interest Rates	Fed left with non-traditional means as interest rates go to 0%	Fed holds the discount rate until after election	Fed forced to raise interest rates in early 2004 as rapid growth sparks inflation concerns
Impact on Real Estate	• Office vacancies increase • Industrial demand negative • Multifamily suffers from effects of weak economy, low mortgage rates • Retail again sees bankruptcies causing distress in select malls • Hotels fail to rebound • Credit problems plague all sectors	• Office rents hit trough, and NOI continues to fall • High industrial vacancy continues downward pressure on rent • Multifamily begins improvements as year progresses • Average retail rents are stable to increasing • Hotels rebound strongly as safety concerns fade further	• Office vacancy improves • Industrial sees strong demand and vacancies decline as business spending and hiring quickly rebounds • Multifamily gets boost from rising mortgage rates • Expanding pie leaves enough room for multiple retail sectors • Lack of construction creates sharp rebound in hotel occupancy
Source: Real Estate Research Corporation, Torto Wheaton Research, Principal Real Estate Investors