A rebound in economic growth and job gains over the next year, coupled with an expected retreat in oil prices and strong business spending in the second half of this year, is setting the stage for improvements in commercial real estate, according to the National Association of Realtors Commercial Real Estate Quarterly.

David Lereah, NAR’s chief economist, said there already is a strong flow of capital into commercial real estate. “This optimism by investors says more about the future of the commercial real estate sector than anything else,” he said. “The investment level shows they understand the value of portfolio diversification and the fundamental demand for commercial real estate that occur in a growing economy.”

More than $99 billion in commercial sales took place in 57 tracked metropolitan areas during the first eight months of 2004, up from $54.6 billion during the same period in 2003. This includes a 66 percent increase in the purchase of office buildings and a 40 percent rise in multifamily property transactions.

More than 45 percent of overall commercial spending this year has been on acquisition of investment grade office buildings. Private national and local investors accounted for 47 percent of transaction volume, publicly traded REITs represented just over a quarter of the total, and institutions made up 11 percent. Foreign investment totaled 7 percent of commercial transactions and private REITs 5 percent; other categories were less than 4 percent.

NAR President Walt McDonald, broker-owner of Walt McDonald Real Estate in Riverside, Calif., said declining vacancy rates are behind the optimism in commercial investment. “Commercial market vacancy rates have been steadily declining due to the growing demand for space,” he said.

“It looks like we’ll see an acceleration in the demand for space over the next year with declining vacancy rates in the office, industrial and multifamily sectors.”

The NAR analysis covers a wide range of statistics and market rankings for the major commercial sectors in the 57 markets tracked, including the office, retail, industrial and multifamily markets, as well as market sector forecasts. The report was produced with data provided by Torto Wheaton Research and Real Capital Analytics.

Office and industrial markets on the East and West Coasts are fairing the best. Office markets with low vacancy and high demand include Ventura and Riverside Counties in California, and in the East on Long Island and in New York City. On the industrial side, Los Angeles continues to dominate the market, while Washington, D.C., is strong in most categories and leads in retail rent growth.

Net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, should total 45.3 million square feet this year, up from only 20 million in 2003. Vacancy rates in the 57 markets tracked are projected to decline 0.3 percentage points to 16.3 percent in 2004, and drop to 15 percent next year. Office rents are expected to rise 1.4 percent in 2004 and another 1.9 percent in 2005.

In the retail sector, net absorption is seen at 22.1 million square feet in 2004, compared with 11.8 million last year. The average vacancy rate for retail space in the 57 metro markets is projected to be fairly stable at 8.2 percent this year compared with 8.1 percent in 2003; vacancies are seen at 8.1 percent next year. Retail rents are forecast to rise 3.6 percent this year and another 4.2 percent in 2005.

The industrial market continues to be impacted by additions to inventory, especially through the build-to-suit process. Net absorption is projected at 97.4 million square feet this year, up from 16.5 million in 2003. Because a large volume of new space has come on the market, the national vacancy rate is expected to average 11.7 percent this year, close to the 11.6 percent rate in 2003, and then slip to 11.4 percent next year. Industrial rents should decline 1.3 percent in 2004 and essentially hold flat in 2005.

The apartment rental market – multifamily housing – is expected to see a net absorption of 260,000 units in the 57 markets tracked during 2004, compared with only 159,400 last year. The average vacancy rate is expected to be 6.2 percent this year, down from 6.4 percent in 2003, then eases to 6 percent next year. Average rent is forecast to rise 1.2 percent in 2004 and another 2.2 percent next year.

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