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Realtors moderate growth projections for US commercial property

NAR chief economist, Lawrence Yun, said the weakening economy will slow the growth in demand for space. ‘Disappointing economic growth in recent months means a slower recovery for most of the commercial real estate sectors, although multifamily housing continues to benefit from pent up demand resulting from an abnormal slowdown in household formation in recent years,’ he said.

‘Many young people, who normally would have struck out on their own from 2008 to 2010, had been doubling up with roommates or moving back into their parents’ homes. However, they’ve been entering the rental market as new households in stronger numbers this year. As a result, apartment vacancy rates are declining and rents are rising at faster rates,’ he added.

He added that a ‘healthy’ recovery is already occurring in the multifamily sector, with average apartment rent expected to rise 2.5% this year and another 3.2% in 2012. ‘Normally, rising rents correspond to rising home prices. However, this isn’t happening in this recovery because buyers are constrained by unnecessarily restrictive mortgage underwriting standards, so the underlying demand isn’t drawing inventory down quickly enough to support price growth,’ he said.

Looking at commercial vacancy rates from the third quarter of this year to the third quarter of 2012, NAR forecasts vacancies to decline 0.3% in the office sector, 0.6% in industrial real estate, 0.7% in the retail sector and 0.9% in the multifamily rental market.

It’s Society of Industrial and Office Realtors Commercial Real Estate Index, an attitudinal survey of 266 local market experts, shows an erosion in market conditions. All regions posted declines except the West.

The SIOR index, measuring the impact of 10 variables, declined 2.6% to 54.9 in the second quarter, following a strong gain of 6.8% in the first quarter and remains well below the level of 100 that represents a balanced marketplace. But it had seen six consecutive quarterly improvements prior to last quarter’s decline. The last time the index was at 100 was in the third quarter of 2007.

Fundamentals are largely unchanged, with vacancy rates relatively flat. Eight out of 10 respondents said office and industrial leasing activity is below historic levels, and seven out of 10 said asking rents are below a year ago. It remains a tenant’s market, with many tenants benefiting from moderate concessions and rent discounts.

Construction activity is nearly nonexistent in most areas, and it is a buyer’s market for development acquisitions. Local experts said commercial office and industrial prices are below construction costs in 83% of markets.

Vacancy rates in the office sector are forecast to fall from 16.6% in the third quarter of this year to 16.3% in the third quarter of 2012. The markets with the lowest office vacancy rates currently are Washington, D.C., with a vacancy rate of 8.6%, New York City, at 10.1% and Long Island at 13%.

Office rents are expected to rise 0.8% in 2011 and another 1.5% next year. Net absorption of office space in the US which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be 28.3 million square feet this year.

Industrial vacancy rates are likely to decline from 12.7% in the current quarter to 12.1% in the third quarter of 2012.

At present, the areas with the lowest industrial vacancy rates are Los Angeles, with a vacancy rate of 5.5%, Orange County, California at 6.2% and Miami at 8.9%.

Annual industrial rent is expected decline 0.9% this year before rising 2% in 2012. Net absorption of industrial space nationally should be 47.8 million square feet this year.

Retail vacancy rates are projected to decline from 12.9% in the third quarter of this year to 12.2% in the third quarter of 2012.

Markets with the lowest retail vacancy rates currently include San Francisco, 3.8%, Northern New Jersey, 6.1%, and Los Angeles, Long Island, and San Jose, California all at 6.4%.

Average retail rent is forecast to decline 0.4% this year, and then rise 0.7% in 2012. Net absorption of retail space is seen at 5.6 million square feet this year.

The apartment rental market, multifamily housing, should see vacancy rates drop from 5.5% in the current quarter to 4.6% in the third quarter of 2012. Apartment vacancies below 5% generally are considered a landlord’s market.

Areas with the lowest multifamily vacancy rates presently are Minneapolis, 2.5%, New York City, 2.8%, and Portland, Oregon at 2.9%. Multifamily net absorption is likely to be 237,700 units this year.