The improving economy and rising job market mean the fundamental demand for commercial real estate space will rise over the course of the year and create an even stronger demand that will see rising rents in 2005, according to the National Association of Realtors Commercial Real Estate Quarterly.

David Lereah, NAR’s chief economist, said 1.2 million payroll jobs were added to the economy during the first five months of this year. “We could see an average of 210,000 to 240,000 new jobs per month over the next two years, which will create additional demand for commercial real estate,” he said.

“A rise in net absorption of commercial space is expected over the course of the year. Rents are firming and all sectors can expect higher rents in 2005 as vacancy rates decline,” Lereah said.

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.

NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., said office properties continue to dominate investor interest. “Two out of five investment dollars spent in commercial real estate are on office buildings,” he said. During the first quarter, $27 billion worth of commercial real estate traded hands. Of that, 41 percent was spent on office buildings.

Net absorption of office space, which includes leasing of new space coming on the market, as well as space in existing properties, is projected to rise significantly this year to 77.6 million square feet from only 28.2 million in 2003, a 63 percent increase. Even so, a large volume of new office space means vacancy rates in the 54 markets tracked should decline only 0.5 percentage points to 17.4 percent in 2004. With plentiful supply, office rents are expected to average 1.9 percent lower this year before rising 2.4 percent in 2005.

In the retail sector, net absorption is forecast at 102.7 million square feet in 2004, up strongly from 77.9 million last year. The average vacancy rate for retail space in the 54 metro markets is projected to drop to 12.4 percent this year from 12.9 percent in 2003. Retail rents should rise by 2.8 percent in 2004 and another 1.9 percent next year.

Warehouse net absorption is seen at 92.6 million square feet this year, a healthy rise from 72.3 million in 2003. The national vacancy rate is expected to average 10.1 percent in 2004, down from 10.5 percent last year. Warehouse rents are projected to slip 0.2 percent in 2004 before rising 1.7 percent in 2005.

The apartment rental market – multifamily housing – should experience a net absorption of 143,900 units in 2004, compared with 131,500 last year. The average vacancy rate is expected to hold at 7.1 percent in 2004, unchanged from last year, with average rent forecast to rise 0.3 percent in 2004 and another 1.8 percent next year.

The Commercial Real Estate Quarterly is published by the NAR Research Division for the Realtors Commercial Alliance (RCA). The RCA, formed by NAR in 1999, serves the needs of the commercial market and the commercial constituency within NAR.

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