Commercial real estate conditions are uneven across the country and vary notably in some areas, according to a commercial real estate update and forecast presented in Washington, D.C., this week at the National Association of Realtors Midyear Legislative Meetings & Trade Expo.

NAR Chief Economist Lawrence Yun said that just like residential real estate, performance in the commercial sectors is greatly mixed across the country. "It’s just as important to understand local market variations in commercial real estate as it is in the residential sector because local conditions can vary considerably," he said. "Commercial fundamentals are good, but investment has been hurt by the credit crunch — investment in the commercial sectors decelerated in the first quarter after setting a record in 2007."

During the first three quarters of 2007, commercial real estate investment was in excess of $100 billion per quarter. In the first quarter of 2008 it slowed to the range of $35 billion to 38 billion.

In analyzing NAR’s Commercial Leading Indicator for Brokerage Activity, which will be updated May 21, Yun said to expect broadly slower net absorption for office and industrial space. "I see a topping off in commercial building construction, and a decline in private nonresidential construction spending," he said. "We project generally softer rent growth in commercial real estate, and modestly lower business opportunities in most market areas for commercial practitioners. As in the residential sector, areas with strong job growth are doing fairly well."

Overall job gains are slowing, but retail employment has been weak since the beginning of this year, construction jobs have been trending down since the beginning of last year, and manufacturing jobs have been trending down since the start of the decade, Yun noted. "On the other hand, professional business service jobs have been rising since the middle of 2003, and that supports demand in the office market. Wholesale trade jobs have trended up since the middle of 2004, reflecting stronger international trade conditions."

Job growth has been strongest in Colorado, Louisiana, Texas, Washington, Wyoming and Utah, and job losses have been greatest in Arizona, California, Florida, Michigan, Nevada and Ohio.

Even with concerns about inflation and consumer confidence, and weakness of the dollar, corporate profits have been near record highs. Exports are growing faster than imports, and business spending on equipment and software has trended up strongly since the beginning of 2003.

"Altogether, I don’t expect a recession, but rather a period of slow economic growth that should improve in the second half of this year," Yun said.

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

Office Market

Net absorption of office space in 57 markets tracked, including the lease of new space coming on the market as well as space in existing properties, should decline from 21.2 million in the second quarter of 2007 to 8.7 million in the current quarter.

Office vacancy rates are forecast to average 13.3 percent in the fourth quarter, up from 12.5 percent a year earlier. Annual rent growth in the office sector is likely to be 3.5 percent in 2008, compared with 8 percent last year.

Industrial Market

Net absorption of industrial space in 58 markets tracked is estimated to edge down from 35.4 million square feet in the second quarter of last year to 33.3 million in the second quarter of 2008.

Industrial vacancy rates nationally will probably rise to 9.6 percent in the fourth quarter from 9.4 percent in the same period in 2007. Annual rent growth should be 3.3 percent by the end of 2008, compared with 3.6 percent in the fourth quarter of last year.

Retail Market

Net absorption of retail space in 53 tracked markets is seen to rise from a negative 169,000 square feet in the second quarter of last year to 6.4 million square feet in the current quarter.

Vacancy rates are projected to decline to 8.8 percent by the fourth quarter from 9.2 percent at the end of last year. Rents are forecast to rise an average of 1.4 percent in 2008 compared with a 3.2 percent increase last year.

Multifamily Market

Net absorption in the apartment rental market — multifamily housing — is expected to rise slightly in 59 tracked metro areas, from 70,700 units in the second quarter of 2007 to 71,800 units in the current quarter.

Vacancy rates are projected to average 4.8 percent in the fourth quarter, down from 5.1 percent at the end of 2007. Rents are likely to rise 3.8 percent in 2008, up from a 3.1 percent gain last year.

***

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