...Inflationary pressures are subsiding and, most important, commercial real estate fundamentals remain solid and improving across all property sectors.

Through midyear, the U.S. economy ran stronger than industry observers had expected, but slowdown has begun. Third-quarter real gross domestic product growth came in at 1.6 percent, down from 2.6 percent in the previous quarter and 5.6 percent in the first quarter. Housing, which kept the economic recovery going longer and stronger, is clearly in decline. Major domestic automakers have announced production declines stretching well into 2007. Oil has dropped more than $20 a barrel since August, largely because of reduced demand signaling a possible cyclical peak in the economy. The yield curve remains flat to slightly inverted, which points to a slowdown; and through late 2006, the U.S. Leading Economic Indicator also continued to point toward a slowdown.

The consumer, who has driven this five-year-old recovery, continues to do so, assisted by reduced energy costs and continued high levels of home equity withdrawals from single home refinancings, but at a decelerating rate of growth. Warning signs of future retail spending declines are flashing; examples include the recent numbers and projections from Wal-Mart--an important proxy for low-to middle-income retail spending trends.

EXPECT HAWKISH FED DESPITE ENCOURAGING TRENDS

Understanding that...

NOTE: All illustrations and photos have been removed from this article.



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