No, our cover story is not a case of irrational pessimism. Most commercial property sectors are floundering due to extremely weak real estate fundamentals, and the situation is not likely to improve over the next six months. Okay, if you feel like going back to bed and pulling the covers over your head, I certainly understand.

Much has been written about the dramatic rise in the stock market this year. The Dow Jones Industrial Average reached 9,300 in mid-June, its best showing since July of last year, leading many observers on Wall Street to predict that it could hit 10,500 by the end of 2003. The bulls have chased the bears, at least for the moment.

But it is jobs that count in real estate, and right now the labor market remains the biggest and most persistent obstacle to recovery. Applications for initial jobless aid totaled 404,000 during the third week of June, the 19th consecutive week that jobless claims surpassed the critical 400,000 level. Economists believe anything above 400,000 is a sign of a weak labor market.

Layoffs are still occurring, just at a slower pace. Job-cut announcements dropped more than 50% to 68,623 in May from 146,399 in April, Chicago job outplacement firm Challenger, Gray & Christmas reports. While wholesale job cuts are waning in frequency, an added concern is that many jobs are moving overseas.

Compounding the problem for office landlords is that corporations have become quite adept at doing more with less during this downturn, leading to higher productivity in the workplace. According to the U.S. Department of Labor, the average worker today produces 7% more goods and services per hour than in 2001. Increased worker productivity enables employers to delay hiring additional workers and affects office leasing activity.

Still, there are some glimmers of hope. Corporate earnings are on the rise, and with all the fiscal and monetary stimulus that's being pumped into the economy, business investment is expected to finally perk up, which would be good for commercial real estate.

Despite the positive effects of low interest rates on the industry, at this point in the cycle many real estate professionals would welcome rising rates because it would signal an improved economy. “With the combination of a rising stock market, which is going to attract more of the capital that's now on the sidelines, and increased government deficits to pay for tax cuts and the war in Iraq, inevitably rates are going to start rising,” says Tom Szydlowski, CEO of McLean, Va.-based Reilly Mortgage, a mortgage banker specializing in multifamily loans. “When rates start rising, I'll know that the economy has picked up.” (For more details on interest rates and the Federal Reserve's monetary policy, please see page 20.)

The lenders have been the busiest of all during this down cycle because interest rates are at such historic lows. The 10-year Treasury yield has ranged from 3.10% to just over 4% over the past year, sparking a refinancing wave. Unfortunately, much of the rest of the industry is in a holding pattern — an ideal time to work on perfecting that golf swing.