The impact of hurricanes is affecting many local commercial real estate markets, but job creation and increased trade are shaping the overall market, according to the National Association of Realtors Commercial Real Estate Spotlight.

David Lereah, NAR’s chief economist, said it takes time for commercial real estate to respond to changes in the overall economy. “There is a well-known lag effect in commercial real estate, with a strong rise in jobs over the last two years currently bearing fruit in terms of higher demand for commercial space, especially in the office sector,” he said. “In addition, increases in trade are benefiting industrial properties such as warehouse and distribution facilities.”

NAR President Thomas M. Stevens from Vienna, Va., explained other factors at play in commercial real estate sectors. “People displaced by hurricanes are having a large impact on the apartment market across many areas of the South,” said Stevens, senior vice president of NRT Inc. “Consumer spending is sustaining retail real estate, but that sector is seeing relatively modest growth and conditions vary widely.”

Condo conversion accounted for a big increase in multifamily transactions this year. “The overall flow of capital into commercial real estate is at an unprecedented level, with multifamily transactions accounting for about a third of the total,” he said.

Through the first nine months of 2005, a record of $188 billion in investment-grade real estate traded hands, not counting transactions valued at less than $5 million. “These figures demonstrate the value of commercial real estate as part of a diversified investment strategy,” Stevens said.

The NAR forecast for four major commercial sectors includes analysis of third-quarter data in 57 metro areas tracked. The sectors include the office, industrial, retail, and multifamily markets, plus some additional information for the hospitality sector. The metro data were provided by Torto Wheaton Research and Real Capital Analytics.

In the office sector there is sustained improvement, driven by approximately 580,000 new office jobs created over the last two years. Vacancy rates are projected to drop to 13 percent in the fourth quarter and to 11 percent by the end of 2006, compared with 15.4 percent in 2004. Office rents are seen to rise 4 percent for 2005 and another 5.5 percent in 2006; they were essentially flat in 2004 with a 0.4 percent gain.

Areas with the lowest office vacancies currently include Ventura County, Calif.; Orange County, Calif.; West Palm Beach, Fla.; New York City; and Fort Lauderdale, Fla., all with vacancy rates of 8.1 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, is expected to be 84.4 million square feet in 2005 and 78.3 million in 2006. This compares with 77.7 million square feet absorbed in 2004 and only 20 million in 2003.

The Washington area led the nation in total office space absorption in 2005, followed by New York, Phoenix, Los Angeles and Dallas.

The industrial sector also is experiencing a decline in vacancy rates – forecast at 9.5 percent in the fourth quarter and 8.4 percent a year from now. In 2004, industrial vacancies stood at 10.9 percent. Industrial rents are likely to grow 2.1 percent for 2005 and 3.4 percent in 2006, following a decline of 0.6 percent in 2004.

Trade patterns continue to benefit industrial property, but congestion in Southern California is diverting some traffic from China through the Panama Canal in order to reach Eastern markets. The areas with the lowest industrial vacancies are West Palm Beach, Fla.; Los Angeles; Riverside, Calif.; Long Island, N.Y.; and Las Vegas; all with vacancy rates of 6.1 percent or less.

Net absorption of industrial space in the 57 markets tracked should be 251.3 million square feet in 2005, and 216.1 million in 2006, up strongly from 176.5 million square feet absorbed in 2004 and a very modest 16.5 million in 2003.

In the retail sector, the vacancy rate is expected to ease to 7.2 percent in the fourth quarter and 6.9 percent a year from now, down from 7.5 percent in 2004. Rent growth is seen at 3.8 percent in 2005 and 3.6 percent in 2006, up from 3.3 percent in 2004.

Retail markets expected to have the lowest vacancies – forecast through 2007 – include Las Vegas; Oakland, Calif.; San Jose, Calif.; Ventura County, Calif.; and San Francisco. Net absorption of retail space in the 57 markets tracked is projected to be 56.2 million square feet in 2005 and 31.6 million in 2006, compared with 27.1 million in 2004.

The apartment rental market – multifamily housing – should see vacancy rates at 5.3 percent in the fourth quarter and 4.8 percent by the end of 2006, down from 6.2 percent in 2004. Average rent is likely to rise 2.8 percent in 2005 and 5.6 percent in 2006, up from a 1.5 percent increase in 2004.

Areas with the lowest apartment vacancies are Fort Lauderdale, West Palm Beach, Miami, Orlando and Los Angeles, all with vacancy rates of 2.7 percent or less. Houston- and Atlanta-area vacancies plummeted due to demand by hurricane evacuees, and will lead the nation in absorption of units during 2005.

Multifamily net absorption is forecast at 316,000 units in 57 metro areas tracked in 2005, and 264,000 in 2006, compared with 264,300 absorbed in 2004 and a modest 159,400 units 2003.

After Houston and Atlanta, the strongest multifamily absorption this year is expected in Chicago, Dallas and Boston.

Purchases of multifamily property rose 90 percent in 2005 – much of the rise is attributable to conversion of apartments into condos, with 150,000 units converted in the first 10 months of 2005. Converters dominate investment activity in every region except the Southwest, where private local buyers are most active, but conversion is expected to subside in 2006.

A fifth commercial sector, hospitality, is experiencing temporarily inflated occupancy levels that result from demand by hurricane evacuees. Hotels and motels in cities near impacted regions are seeing the greatest demand, but Houston, Dallas-Fort Worth, Atlanta, San Antonio and Memphis also are experiencing higher occupancies as a result.

Hospitality markets projected to have tightening room availability in 2006 include Los Angeles; New York; Phoenix; Portland, Ore.; and San Diego.

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

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