The demand for commercial real estate space has spiked in regions surrounding the Hurricane Katrina disaster zone, providing additional stimulus to major commercial market sectors that already were experiencing growth, according to the National Association of Realtors’ Commercial Real Estate Spotlight.

David Lereah, NAR’s chief economist, said key industries in the affected zone must rebuild or relocate to survive. “Over the last week, we’ve been hearing about rapid absorption of commercial inventories in nearby areas that survived widespread hurricane damage. In addition, the need has extended geographically to other areas with increased demand for space in adjacent states,” he said. “The greatest demand appears to be in the industrial, multifamily and office markets, but the long-term impact from Hurricane Katrina is uncertain as displaced tenants rethink their future.”

With operations shifting away from New Orleans, at least for the short term, markets like Houston, Dallas-Fort Worth, Atlanta, Tampa and Miami could see vacancy rates for office and industrial space decline by two to three percentage points by the end of 2006. Rent growth will rise along with the new demand.

NAR President Al Mansell of Salt Lake City said it isn’t known how much relocation may be permanent. “There is a critical need for shipping, warehousing and transit in the Mississippi delta region,” he said. “The question is how much rebuilding will occur in New Orleans and stricken coastal areas, how much will be relocated to higher ground, and how much will stay in the areas that currently are experiencing increased demand.”

The NAR forecast for four major commercial sectors is based on analysis of second-quarter data in 57 metro areas tracked, including the office, retail, industrial and multifamily markets. It was adjusted by the recent developments in the Gulf Coast region, including activity in non-tracked markets. Data for the 57 monitored metros was provided by Torto Wheaton Research and Real Capital Analytics.

In the office sector, vacancy rates are at the lowest level since 2001, resulting from a rise in space absorption and a decline in speculative building. Vacancy rates are expected to drop to 13 percent by the end of the year and 11.3 percent by the fourth quarter of 2006, down from 15.4 percent in 2004. Office rents should grow 4.4 percent both this year and in 2006, after rising only 0.4 percent in 2004.

Areas with the lowest office vacancies currently include Ventura County, Calif.; Orange County, Calif.; New York City; West Palm Beach, Fla.; and Washington, D.C., all with vacancy rates of 8.6 percent or less.

Net absorption of office space in the 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, has shown strong gains and is forecast at 83.4 million square feet this year and 69.9 million in 2006. The total was 77.7 million square feet absorbed last year, and only 20 million in 2003.

The industrial sector also is seeing gains as trade and shipping patterns continue to impact the market. Vacancy rates should drop to 10 percent in the fourth quarter and 9.3 percent by the end of 2006, down from 10.9 percent last year. Industrial rents are expected to rise 2.2 percent in 2005 and 2.7 percent next year; they declined 0.6 percent in 2004.

The areas with the lowest industrial vacancies are West Palm Beach, Fla.; Los Angeles; Riverside, Calif., Las Vegas; and Long Island, N.Y.; and all with vacancy rates of 6.5 percent or less.

The recently ratified Central American Free Trade Agreement should increase industrial demand in Florida, which also will benefit from China routing goods through the Panama Canal to avoid congestion in Southern California. Ports in Texas, and as far north as Charleston, S.C., also could gain from rerouted shipments. Midwestern markets are experiencing a rebound in demand for industrial space.

Ports in Houston, Tampa and Miami likely will see some industrial operations shifted away from New Orleans.

Net absorption of industrial space in the 57 markets tracked is forecast at 198.3 million square feet in 2005, and 178.1 million next year, up from 176.5 million square feet absorbed in 2004 and only 16.5 million in 2003.

In the retail sector, the vacancy rate is expected to decline to 7.2 percent by the end of 2005 and 7.1 percent in the fourth quarter of next year, down from 7.5 percent in 2004. Rent growth is projected at 4 percent for both 2005 and 2006; it was 3.3 percent in 2004.

The biggest concern in the retail market is the merger of Federated Department Stores with the May Department Store Co., with estimates calling for the closure of 68 stores across the country. Retail markets with the lowest vacancies include Las Vegas; San Francisco; San Diego; San Jose, Calif.; and Ventura, Calif., with vacancy rates of 3.1 percent or less.

Net absorption of retail space in the 57 markets tracked is seen at 56.2 million square feet this year and 29.6 million in 2006, compared with 27.1 million last year.

The apartment rental market – multifamily housing – should see vacancy rates drop to 5.1 percent in the fourth quarter and 5 percent by the end of 2006, down from 6.2 percent last year. Average rent is projected to increase 2.7 percent in 2005 and 3 percent next year, compared with a 1.5 percent rise in 2004.

Condo converters continue to influence multifamily investment across the country, with conversion of apartments into condos accounting for more than half of the dollar volume in the Mid-Atlantic and Southeast, and more than 40 percent of volume in the Northeast and Midwest. In the last year, approximately 120,000 rental apartments have been removed from the inventory due to conversions.

Areas with the lowest apartment vacancies are Los Angeles; Orlando; Newark, N.J.; Ft. Lauderdale, Fla.; and West Palm Beach, all with vacancy rates of 2.2 percent or less.

Multifamily net absorption is forecast at 282,300 units in 57 metro areas tracked this year and 200,100 next year, compared with 264,300 in 2004 and only 159,400 units absorbed in 2003.

The flow of capital into commercial real estate continues unabated this year, with a record of $134 billion in investment grade transactions through July – up more than 50 percent from the same period in 2004. Office buildings experienced the greatest surge in transactions, followed by industrial properties.

The Commercial Real Estate Spotlight is published by the NAR Research Division for the Realtors Commercial Alliance.


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