Demand for commercial real estate trends up

The growing U.S. economy will eventually need to add workers, which will foster positive fundamentals for commercial real estate, according to the National Association of Realtors Commercial Real Estate Quarterly.

David Lereah, NAR’s chief economist, said the demand for commercial real estate space is trending up. “With a continuation of low interest rates and high productivity, the economy is experiencing a recovery. Since employers have gotten about as much as they can from higher productivity, they’ll have to start hiring more workers which will boost the demand for space.”

The NAR analysis covers a wide range of statistics and market rankings for the major commercial sectors in 54 markets tracked, including the office, retail, warehouse and multifamily markets, as well as market sector forecasts. It is produced with data provided by Property & Portfolio Research.

With a slowdown in new construction and a modest resurgence in demand, the office, warehouse and multifamily sectors showed net positive absorption of space in the fourth quarter of 2003, which includes leasing of new space coming on the market as well as space in existing properties. The retail sector was down slightly but is projected to build momentum during the course of this year.

“We expect a marked increase in space absorption for both the office and warehouse segments due to a pent-up demand against the backdrop of an improving economy,” Lereah said. “Rent growth will surpass the Consumer Price Index by the middle of next year for the office sector, and by the end of 2005 for warehouse properties. Stronger rent growth should occur later in the retail and apartment sectors.”

NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., said commercial real estate remains attractive to investors. “Current yields for commercial real estate are in the range of 6 to 8 percent – well in excess of the 3 to 5 percent gains from treasuries, bonds and other forms of investment,” he said.

“Properties that have minimal risk, such as fully leased buildings with little lease rollover, are in demand and are able to command top dollar,” McDonald said.

Net absorption of office space is projected to more than triple, rising to 91.7 million square feet in 2004 from only 28.2 million last year. Office vacancy rates in the 54 markets tracked should decline to 17.4 percent this year from 17.9 percent in 2003. Average office rents are expected to rise 0.2 percent this year and 1.2 percent in 2005 after dropping 6.4 percent in 2003.

In the retail sector, net absorption is forecast at 96.2 million square feet this year compared with 77.9 million in 2003. The average vacancy rate for retail space in the 54 metro markets is projected to drop to 12.4 percent in 2004 from 12.9 percent last year. Retail rents should rise by 1.8 percent this year and 0.3 percent in 2005 after rising 0.3 percent in 2003.

Warehouse net absorption is projected at 88.3 million square feet in 2004, up from 72.3 million last year, and is forecast to rise at an even stronger pace in 2005, reaching 125.7 million square feet. The national vacancy rate is expected to drop to 10.0 percent this year from 10.5 percent in 2003. Warehouse rents are seen to slip 0.6 percent in 2004 and then rise 0.8 percent in 2005 after declining an average of 3.3 percent last year. The apartment rental market — multifamily housing — should experience a net absorption of 153,500 units in 2004, up from 131,500 last year. The average vacancy rate is expected to drop to 6.8 percent this year from 7.1 percent in 2003, with average rent forecast to hold even this year before rising 2.1 percent in 2005; rents declined an average of 2.5 percent last year.

The Commercial Real Estate Quarterly is published by the NAR Research Division for the Realtors Commercial Alliance. The RCA, formed by NAR in 1999, aims to serve the needs of the commercial market and the commercial constituency within NAR, including commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and NAR affiliate organizations.