Tuesday, December 3, 2013


If we had been waiting for the “year of recovery”, the year local economy was finally going to turn around, 2013 is probably it (and I mean that the way it sounds – yeah, 2013 is probably about the best we can hope for). The year has been bery bery good to commercial real estate, and the wider economy has seen some improvement, though not nearly as much as we would like.

Looking at 2012, we saw a year with faster improvement in the first two-thirds of the year, and then a slow-down and fall that lasted into 2013, essentially erasing all of the year’s earlier gains. When things began turning around in 2013, the question was – will it last?

Now, economies work in cycles (and cycles within cycles, and cycles next two cycles that sometimes correspond, which in itself is another cycle), and cycles don’t necessarily work within the parameters of human defined time. After all, some day had be chosen as the first day of recorded time, and that choice was ultimately arbitrary. If you peruse the accompanying graph, you can see a pretty fair example of these cycles in the CRE Recovery Index (which I’ve now extended back to 1995). From 2002 to 2007, you can see the index peaking in October of each year, and then retreating from November to March or April, before rising yet again.

Even during the crash years from 2008 to 2010 you can see small peaks each October, though obviously during those years growth in the index never lasted for more than two or three months, followed by very sharp declines.

By 2010, the normal cycle had once again reasserted itself. Growth in the index was not as smooth and stable, but did generally follow the pattern outlined above, though with weaker growth and sharper declines than during those halcyon days of old.

What does this mean for 2014? Well, if the pattern holds, it is likely we will see the index begin to retreat in November or December. This retreat will last through the first quarter of 2014. In 2012, the measures that caused the index to tumble were Visitor Volume, New Residents and Los Angeles Port Traffic. In 2011, it was Visitor Volume and Los Angeles Port Traffic. In 2010, it was New Home Sales, Visitor Volume and Los Angeles Port Traffic. Do you see the pattern?

We can assume that Visitor Volume and LA Port Traffic are going to begin to fall in the very near future. At the moment, they remain strong. Their retreat is cyclical, and thus normal and nothing to fear. If they perform better than expected, then so much the better.

The questions we need to grapple with, then, are as follows: 1) Will there be other measures of the local economy that will suffer during the inter-year lag months? 2) Were the growth months in 2013 strong enough to keep us on a better footing after those months of retreat.

My guess is that we will not see any other measures of the economy enter into retreat along with Visitor Volume and Port Traffic, and thus when the Spring thaw reaches us in 2014, we will find ourselves in a stronger position than we had been in 2013, and well on our way towards what we might term a “complete recovery”. I think I see the light at the end of the tunnel.
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