Commercial Real Estate Vacancy Rates to Decline but Rent Recovery Delayed

A stabilization trend is taking place in commercial real estate sectors, but in most markets rent will remain soft except for multifamily rentals, according to the National Association of Realtors®.

Lawrence Yun, NAR chief economist, said a pullback in construction is helping stabilize the market. “Very limited construction of new commercial real estate over the past few years has essentially fixed the supply of available space,” he said. “This means vacancy rates could fall quickly from any increase in demand for commercial space.”

From the first quarter of this year to the first quarter of 2012, NAR expects vacancy rates to decline 0.5 percentage point in the office sector, 1.3 points in industrial real estate, 0.1 point in the retail sector and 0.9 percentage point in the multifamily rental market.

“Even with declining vacancy rates, rents are not likely to turn positive in most markets until next year, outside of multifamily rental properties,” Yun said. For example, office rents are forecast to fall 1.8 percent this year before turning higher by 4.0 percent in 2012.

“Apartment rent increases are expected to accelerate from job creation leading to new household formation, particularly among the young adult population who will seek their own housing arrangements – many will be leaving their parents’ homes, or choose to live with fewer roommates,” Yun said.

Average apartment rent is projected to grow 3.4 percent this year and another 4.2 percent in 2012.

“Rising apartment rent in combination with rising oil prices could push the overall inflation rate beyond a comfort level, which could then force the Federal Reserve to raise interest rates later this year or early in 2012,” Yun added.

The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of more than 360 local market experts¹, shows a notable improvement in market fundamentals.

The SIOR index, measuring the impact of 10 variables, rose 8.1 percentage points to 50.7 in the fourth quarter, the largest quarterly gain in five years, and is at the highest level since the fall of 2008. However, the index is well below a level of 100 that represents a balanced marketplace. This is the fifth consecutive quarterly improvement following nearly three years of decline, but the last time the index was at the 100 level was in the third quarter of 2007.

Seventy-eight percent of SIOR participants expect improvements in the office and industrial sectors for the first quarter of this year.

There has been an increase of liquidity in Commercial Mortgage Backed Securities, which is helping to open the commercial market to more property transactions; commercial real estate sales had been stalled over the past few years with excessively tight credit conditions. In terms of development acquisitions, it remains a buyer’s market for those with cash or who can obtain credit financing.

NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK² offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office MarketsVacancy rates in the office sector are forecast to decline from 16.5 percent in the first quarter of this year to 16.0 percent in the first quarter of 2012.

The markets with the lowest office vacancy rates currently are New York City and Honolulu, with vacancies in the 8 to 9 percent range.

In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be 14.5 million square feet in 2011.

Industrial MarketsIndustrial vacancy rates are projected to decline from 14.2 percent in the current quarter to 12.9 percent in the first quarter of 2012.

At present, the areas with the lowest industrial vacancy rates are Los Angeles and Salt Lake City, with vacancies of 7.5 percent.

Annual industrial rent is likely to decline 2.5 percent in 2011, before rising 3.0 percent next year. Net absorption of industrial space in 58 markets tracked should be 127.5 million square feet in 2011.

Retail MarketsRetail vacancy rates are expected to slip from 13.0 percent in the first quarter of this year to 12.9 percent in the first quarter of 2012.

Markets with the lowest retail vacancy rates currently include San Francisco; Miami; Honolulu; and Long Island, N.Y., all with vacancies in the 7 to 8 percent range.

Average retail rent is seen to decline 0.9 percent in 2011, then rising 0.7 percent next year. Net absorption of retail space in 53 tracked markets is projected to be 4.8 million in 2011.

Multifamily MarketsThe apartment rental market – multifamily housing – is tightening as the economy improves. Multifamily vacancy rates are forecast to decline from 5.8 percent in the current quarter to 4.9 percent in the first quarter of 2012.

Areas with the lowest multifamily vacancy rates presently are San Jose, Calif.; Pittsburgh; and Newark, N.J, with vacancies in a range around 3 percent.

Multifamily net absorption should be 207,000 units in 59 tracked metro areas in 2011.

NAR

Top 5 Issues Affecting Commercial Recovery

Here are the top five issues facing commercial real estate in 2011, according to consultant Deloitte LLP.

1. The market remains uncertain. The recovery isn’t following previous trends. While there is some indication that the worst may be over, some markets continue to decline.

2. Impact of "amend and extend." Some banks are recognizing that they will never recover full value on some properties and are willing to work with borrowers. This has made it more difficult to tell when the business has hit bottom.

3. High maturities remain a challenge. The high level of maturing debt over the next several years remains a significant barrier to recovery. In addition to commercial mortgage-backed securities (CMBS), loan delinquencies and commercial real estate loan defaults, there is also an increase in strategic defaults as more commercial borrowers make a pragmatic business decision to exit profit-draining investments in order to divert money to performing projects or shareholders.

4. The number of deals is increasing. A good sign.

5. The economy is recovering very slowly. This increases opportunities in distressed properties, but the overall market isn’t in a hurry to pick up.

Source: Deloitte

Commercial Vacancies to Peak Near Early 2011

Multifamily housing is a bright spot, with increased demand expected, NAR says. Read more >

Commercial Market Improvement Will Come Slowly

NAR Chief Economist, Dr Lawrence Yun, predicts high vacancy rates and ubiquitous commercial rent concessions.  Slight employment improvements will help absorption rates for office/warehouse space, and SIOR's (Society of Industrial and Office Realtors) recent survey confirms the forecast of easing in this sector.  More than half the members of SIOR® expect an improvement in Q2 2010.  Rents are down for Office, Industrial, Retail and Multifamily, but not by as much as in Q4 2009, and the trends are improving slightly.  To read the February Commercial Forecast and table on specifics of four commercial sectors, click here.

Commercial Real Estate Mired in Quicksand despite Signs of Economic Recovery

The third quarter of 2009 brought signs of relief to a U.S. economy fighting to emerge from what has been coined the Great Recession. Most measures of economic activity moved in upward trends—gross domestic product turned positive after four quarters of decline; industrial production gained; stock market indices have been surging.

However, commercial real estate did not find its footing in the constantly shifting terrain of weak fundamentals and timid transaction activity. Demand for commercial properties continued on a downward path, adding pressure on prices and rents. Moreover, credit conditions continued to tighten as banks moved to strengthen their balance sheets. As a result, vacancy rates have been rising and the volume of distressed properties has grown. Nonetheless, it is worth noting that the pace of decline in fundamentals is slowing, and sales transactions are posting positive growth.

NAR FORECAST: Commercial real estate is expected to see negative absorption, higher vacancies and declining rents. Commercial financing still poses the main challenge stabilization. While CMBS markets have been revived, volume is insufficient to address maturing debt.

For the 4^th Quarter 2009 report, please visit: http://www.realtor.org/research/research/commercialhome

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