It’s official. The U.S. economy is slowing down. Consumers are getting cautious, businesses jittery and investors downright worried.

What does this mean for commercial real estate? Well, like everything else in the real estate business, that depends on location, location, location.

Some in the real estate industry don’t see the slowdown as a complete catastrophe.

“It appears that after eight years of expansion in our economy and our real estate markets, we will enter a contraction phase in 2001,” said Peter Korpacz, director for the Global Strategic Real Estate Research Group at PricewaterhouseCoopers (PWC). “However, a contraction is not necessarily a bad thing. It simply means that conditions will not be as glowingly attractive as they have been in the past several years.”

We all know the ugly real estate industry scenario. When the markets are good, real estate folks get really excited and overbuild, regardless of whether the fundamentals are there or not.

According to the National Association of Realtors (NAR), all sectors of the commercial real estate market saw strong activity during third-quarter 2000. And all but one are experiencing a “modest” slowdown so far in 2001.

“With the slowing economy, we expect a slight slowdown in all of the sectors except for multi-family housing, which will remain fairly stable,” said David Lereah, NAR’s chief economist.

And according to a recent report by PWC called “Real Estate Value Cycles,” many markets are moving toward a point of stability, with investment and development fundamentals in relative balance.

What does this mean for real estate? Slower rental rates, less property income growth and rising vacancies.

Who will get hammered? Most at risk is retail, which likely will contract over the coming months. In the retail market, NAR reports 33 million square feet was absorbed in the third quarter, while net new space completions totaled 39 million square feet. The national vacancy rate was fairly stable at 7.7 percent.

A slowdown in consumer spending, combined with other negative economic indicators, could quickly lead to lower sales and the closure of marginal stores. NAR predicts that the national vacancy rate will rise to 8.3 percent this year, with rents rising 2.6 percent.

The best markets for retail are strictly Southern, with highest rent growth predicted for New Orleans, Nashville, Birmingham, Tulsa and Houston.

Also set to see contraction is the office sector, which will be hit by a slowly shrinking work force combined with higher levels of supply. The good news is that national vacancy tightened to 9.7 percent in the third quarter. Demand was up 4 percent from a year earlier, with supply up only 2.6 percent.

NAR predicts asking rent of $29.35 per square foot in 2001, compared to $27.87 last year. Based on rent growth, the hottest office markets expected this year are up-and-coming Austin, Newark and Hartford, along with the usual suspects of Boston and New York City.

Meanwhile, warehouse properties likely will continue to provide solid returns. PWC predicts that most warehouse markets will see vacancy rate changes of less than 2 percent over the next five years. And according to NAR, warehouse rents, adjusted for inflation, are projected to rise 2.2 percent in 2001. In this sector, all of the hottest regions are the usual suspects, including Phoenix, San Francisco, Boston, Houston, and Oakland, Calif.

One winner will be the multi-family market. Demand should remain ahead of new supply, resulting in increased rental rates and declining vacancy. Demographic trends and strong household formation are expected to increase demand. As a result, the national vacancy rate is expected to be fairly stable at 7.1 percent in 2001. Of course, Boston, Los Angeles and San Francisco are expected to have strong mutli-family rent growth. Surprising up-and-comers include Detroit and Minneapolis.

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