The commercial real estate markets are continuing to grow with record investment, with individual sectors in many areas seeing tighter vacancy rates and higher rents, according to the latest Commercial Real Estate Outlook of the National Association of Realtors.

David Lereah, NAR’s chief economist, said performance varies among the commercial sectors. “The office and industrial markets continue to shine, supported by job growth and trade, while the rental apartment sector is seeing healthy rent increases,” he said. “The retail sector is essentially flat, but the hotel industry is doing better than at any time since 2001.”

James Marrelli, NAR vice president of commercial real estate, said there is a record flow of capital into commercial real estate. “We’re setting another record this year for investment in commercial real estate,” he said. “Institutional investors, pension funds and foreign investors have focused on commercial-grade properties to diversify portfolio assets, with expectations of solid long-term gains.”

Outside of the hotel sector, more than $236 billion in commercial real estate transaction volume was recorded in the first 10 months of 2006, up from $231.9 billion in the same period of 2005, not including properties valued at less than $5 million.

The NAR forecast for five major commercial sectors includes analysis of quarterly data for various tracked metro areas. The sectors include the office, industrial, retail, multifamily and hospitality markets. Metro data were provided by Torto Wheaton Research and Real Capital Analytics.

Office Market

A reduction in speculative construction of new office space, along with growth in office jobs, means there are positive fundamentals for most market areas. Office vacancy rates are projected to drop to an average of 12.1 percent in the fourth quarter of 2007 from an estimated 12.9 percent currently — the lowest since 2001; at the end of 2005 they were 13.6 percent. Annual rent growth in the office sector next year is expected to be 5.2 percent, after rising 4.3 percent in 2006.

Areas with the lowest office vacancies currently include New York City; Ventura County, Calif.; Miami; Orange County, Calif.; Honolulu; and Riverside, Calif., all with vacancy rates of 8.9 percent or less.

Net absorption of office space in 56 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to be 71.7 million square feet in 2007, compared with 73.7 million this year.

Office-building transaction volume in 2006 has been fueled by portfolio acquisitions, privatization of Real Estate Investment Trusts (REITs), and mergers within commercial real estate. Office buildings this year have accounted for 48 percent of the transaction volume in all commercial sectors, with more than $105 billion trading hands in the first 10 months of 2006, a 36 percent increase over the same period last year.

Industrial Market

Trade is continuing to drive warehouse space, creating a landlord’s market in many areas around the country. Available space is the tightest the market has seen since 2001. Vacancy rates in the industrial sector are forecast to average 9 percent in the fourth quarter of 2007, down from 9.5 percent in the current quarter. Annual rent growth should be 3.8 percent by the end of next year, in contrast with a 1.7 percent annual increase in the current quarter.

Trade with China in particular is impacting demand on both coasts. Traffic in Southern California is so congested that ships are traveling through the Panama Canal to get their cargo to East Coast markets, notably in Florida.

The areas with the lowest industrial vacancies currently are West Palm Beach, Fla.; Los Angeles; Miami; Orange County, Calif.; Fort Lauderdale, Fla.; and Tampa, all with vacancy rates of 5.5 percent or less.

Net absorption of industrial space in 54 markets tracked will probably total 231.1 million square feet in 2007, up from 191.3 million this year.

Industrial transaction volume in the first 10 months of 2006 totaled $32 billion, placing 2006 on track to set a record year. During the same period in 2005, transaction volume was $28 billion.

Retail Market

Vacancy rates in the retail sector should hold at 8.1 percent through 2007, which would be unchanged from the estimate for the current quarter. Average retail rent is projected to grow 1.2 percent next year, after contracting 0.4 percent in 2006.

Much of the lackluster performance is due to persisting vacancies in regional malls, impacted by the merger of Federated Department Stores and the May Co. Department Stores. Strip centers anchored by a grocery store seem to be enjoying the best demand from both a retail rental and investment perspective.

Retail markets with the lowest vacancies currently include Las Vegas; Orange County, Calif.; San Jose, Calif.; Oakland, Calif.; San Francisco; and Honolulu, all with vacancies of 4.2 percent or less.

Net absorption of retail space in 54 tracked markets is likely to total 18.1 million square feet next year, up from 6.8 million in 2006.

Private investors accounted for 64 percent of retail transaction volume during the first 10 months of 2006, with a total retail investment volume of $33.8 billion — down from $41.1 billion in the same period of last year.

Multifamily Market

The apartment rental market — multifamily housing — should see vacancy rates at an average of 5.4 percent in the fourth quarter of 2007, which would be unchanged from the current quarter; it was 6.2 percent at the end of 2005. Average rent is expected to rise 3.9 percent next year, following a 4.3 percent increase in 2006.

The slowdown in home sales this year has kept some people in the rental market, looking for signs of stabilization or waiting for the right time to purchase a home. At the same time, a growing population and household formation is supporting demand for rental housing.

Multifamily net absorption is forecast at 207,400 units in 59 tracked metro areas in 2007, down from 221,900 this year but up from 203,300 in 2005.

The areas with the lowest apartment vacancies currently include San Francisco, Northern New Jersey, Miami, Los Angeles, San Jose and Salt Lake City, all with vacancy rates of 3 percent or less.

During the first 10 months of the year, transaction volume in the multifamily sector totaled $68 billion, down from $70.1 billion in same period of 2005. The slowdown of conversion activity has reduced competition for apartment complexes, with converters accounting for only 12 percent of transaction volume so far in 2006, down from 35 percent in the first 10 months of 2005.

Hospitality Market

Hotel occupancies are seen to average 68.2 percent in 2007, up from 67.6 percent this year. Revenue per available room (RevPAR) is projected at $81.28 next year, up from $77.69 in 2006. A record 29,200 hotel rooms are expected to be added to the inventory in 52 markets tracked in 2007, compared with 10,600 this year.

Markets with the highest RevPAR currently include New York City; Honolulu; San Francisco; Miami; West Palm Beach, Fla.; and Boston, all with RevPAR in excess of $93.

Transaction activity during the first 10 months of this year includes 1,165 hotels with a combined value of $38.7 billion, well above the $30 billion recorded in the same period of 2005.

***

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