Everest Trends: Commercial Real Estate

Below is a visual image of the key components of GDP and how they tend to recover from a recession relative to each other. The vertical axis represents the cumulative change (100 times the natural log) and the horizontal axis represents the quarters after the beginning of a recession. The first graph displays an aggregate of the past 10 recessions. One can clearly see that, on average, residential investment has bottomed before non-residential investment. As you can see in the second graph, the current recession seems to be no exception. Residential investment collapsed well before the start of the recession, while non-residential investment only began to curtail at the end of last year. I am looking to take advantage of this pattern by shorting commercial real estate until I feel that residential real estate has initiated it's bottoming process. Many economists estimate that residential real estate will not bottom for another 6 to 12 months, leaving plenty of room on the downside for commercial real estate. The fundamentals for commercial real estate are weakening along side the economy. A recent PricewaterhouseCoopers Real Estate Investors Survey of 18 major office markets indicated that there was "too much space and too little demand." Until demand strengthens enough to sop up the excess supply, commercial real estate will likely see further price depreciation. The only way I would be able to gain "short" exposure to commercial real estate is through the UltraShort Real Estate ProShares (SRS). I usually try to stay away from the "ultra" ETFs, but this seems to be one of the only viable vehicles for this investment idea. As always, any suggestions are welcome! I would like to thank Professor Hamilton over at Econbrowser for bringing this interesting pattern to my attention. A more in-depth analysis of these components can be found at either Econbrowser or Calculated Risk.