Commercial real estate sectors continue to perform well with sound market fundamentals, according to a commercial market update and forecast released by the National Association of Realtors.

Lawrence Yun, NAR’s chief economist, expects vacancy rates to trend down in most commercial markets next year. “Vacancy rates should be gradually declining in the overall office, industrial, retail and multifamily sectors during 2008, reflecting the underlying demand for space in a growing economy,” he said in a statement. “Areas with strong job growth will see the healthiest commercial markets.”

Yun said recent disruptions in the mortgage market have not had a similar impact on the commercial sectors. “Despite some initial concerns, there have been no serious capital problems for institutional-grade properties, and most of the commercial market is performing well even though some private transactions have been cancelled or postponed,” he said. “As we move beyond confidence and pricing issues on Wall Street, the outlook for 2008 appears to be on a sound footing with investors valuing diversification and long-term commercial returns.”

At the same time, Yun said confidence issues have been a factor in some of the cancelled or postponed transactions. “Not all commercial investors are immune to the psychological effects of Wall Street gyrations or credit concerns, but they should take heart in that pension funds have been increasing their allocation in commercial sectors,” he said. “Such moves are based on careful assessment, and that should provide additional confidence that commercial real estate remains a sound investment in a diversified portfolio.”

Yun noted foreign investors continue to pour funds into U.S. commercial real estate, made more attractive by recent weakness in the dollar. “Foreign investors are looking for good returns in a historically stable economy, and account for nearly 10 percent of total investment in U.S. commercial real estate sectors.”

Other positive factors according to Yun: Two million jobs have been added to the economy over the past year; business spending is rising at an annual rate of 8 percent; and exports continue to rise strongly. Oil prices remain a worry, though.

Office Market

Job growth continues to have a positive impact on the office market, resulting in a rising demand for space. Even with new space coming on line, office vacancies are forecast to decline from an estimated 12.9 percent in the fourth quarter to 12.4 percent by the end of 2008.

Annual rent growth in the office sector is projected at 6.1 percent this year and 3.1 percent in 2008.

Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is likely total 53.8 million square feet in 2007 and rise to 65.1 million next year.

Industrial Market

Demand in ports and distribution hubs remains the driving factor in industrial real estate, in addition to the need for flex space in the technology sector.

Industrial vacancy rates should average 9.6 percent in the fourth quarter and decline to 9.4 percent by the end of next year. Annual rent growth is expected to be 3.9 percent in the fourth quarter, and is seen at 3.7 percent by the end of 2008.

Net absorption of industrial space in 58 markets tracked should total 125 million square feet this year and increase to 165.6 million in 2008.

Retail Market

Vacancy rates in the retail sector have risen this year with a lot on new space on the market, but are forecast at 9.3 percent by the end of the year before easing to 8.9 percent by the fourth quarter of 2008. Average retail rent is likely to rise 2.9 percent in 2007 and 1 percent next year.

Net absorption of retail space in 53 tracked markets is estimated at 12.1 million square feet in 2007 and 19 million next year.

Multifamily Market

Vacancy rates for the apartment rental market — multifamily housing — are projected to average 5.9 percent in the fourth quarter and decline to 5.6 percent by the end of 2008. Average rent is estimated to increase 2.9 percent for all of 2007 and 3.8 percent next year.

Multifamily net absorption should total 209,200 units in 59 tracked metro areas in 2007, and increase to 234,400 next year.

Historical metro data were provided by Torto Wheaton Research and Real Capital Analytics.

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