Signs of recovery abound. The question troubling economists and politicians facing the 2004 elections is: Will the economy and job market improve fast enough to prevent consumers from tightening their purse strings?

GDP grew by an 8.2% annual rate in the third quarter of 2003, the fastest in nearly two decades. Growth in the Q4 is expected to register 4.5%. Defense spending and solid consumption have more than offset the trade deficit's persistent drag. Renewed business confidence and improved business investment will lift 2004 growth to 4% or 5%. In addition, the longest stretch of joblessness since WW II is over, thanks to the combination of a profit recovery and the resumption of business investment.

Manufacturing, which now appears to be moving off a cyclical bottom, will at least stop acting as a brake on growth. Firms have purged most of the excesses that resulted from the investment binge of the 1990s. With inventories at extremely low levels, high productivity rates indicate work forces are lean, and at least some pent-up capital investment demand can be expected after a two-year corporate spending freeze. The slimmed-down companies that have emerged posted four straight quarters of rising profitability, which, coupled with the need to shore up inventories, will lead to more production and employment.

Risks remain, however. The dollar is fragile, due mostly to massive budget and trade deficits, and if the dollar were to depreciate rapidly, interest rates would spike higher, which would dampen housing demand. Pricing pressures from offshore goods are unlikely to abate. While the health of the labor market is improving, employment growth will be stunted by corporations' relentless desire to keep the productivity miracle going.

An improving job market will bolster commercial real estate fundamentals and set the stage for a new growth cycle. In recent years, the unprecedented flow of capital to real estate has elevated prices to record highs in some sectors. Improving tenant demand will allow rental-market fundamentals to catch up to pricing. The intensity of the economic recovery will vary by market and by property sector, with retail leading the way, followed by apartments, with office lagging.

Retail will continue to be the most stable sector, and investor demand will remain strong. Prices for shopping centers rose by an estimated 12% in 2003, to $126 per sf, while the average cap rate dipped just below 9%, down 40 basis points from the previous year. Investors are likely to continue exhibiting high confidence in shopping centers, particularly those occupied by strong national chains that were posted consistent profits through the downturn. While consumer spending has buoyed retail sales, the fact that retail construction has been predominantly demand-driven spared the sector from a sharp rise in vacancy. During 2003 vacancy ticked up just 20 basis points, to 10.5%, and the increase is likely to be erased as tenant demand rises.

In apartments, several forces are set to support or increase renter demand over the next several years. Echo Boomers will add 1.1 million households to the renter pool between 2005 and 2010. Job growth will improve, especially among professional singles, boosting absorption. In addition, many empty-nesters will opt to rent. Rising interest rates pose the greatest short-term risk to prices, but if the increase is orderly, the worst case will see apartment prices remain strong as fundamentals catch up. Apartment operators can look forward to relief in 2004; however, the correction in vacancy will be muted by an active supply pipeline. A 50 basis-point decline in vacancy, to 6.5%, is projected for 2004, which will ready the market for renewed rental growth in 2005.

A corporate recovery sets the stage for a long-anticipated upswing in the office market. Supply has come to a virtual halt, with 2004 completions expected to amount to less than 1% of inventory. The 19 highest-vacancy markets in the country will experience average inventory growth of 0.7%, while the 19 lowest-vacancy markets' office inventories will grow by 1.4%.

With an improved economy, more stable tenants who had been shut out of the markets can begin to resume expansion. But given real estate's lag, a meaningful improvement in net absorption may not occur until late 2004 or 2005. While owners will welcome a turnaround in vacancies, they will need to come to grips with lease rollovers at lower rents during the next 12 to 24 months.

Think Tank member Hessam Nadji is managing director, Research Services, for Marcus & Millichap Real Estate investment Brokerage Co. in San Francisco .