Commercial Market Sound with Record Investment

Washington, DC, June 13, 2007--Investment in commercial real estate remains at record levels with sound fundamentals in most sectors, according to the latest Commercial Real Estate Outlook of the National Association of  Realtors.

Lawrence Yun, NAR senior economist, said there are variations across the commercial sectors.  “The overall office market has been booming, the industrial sector is holding its own, retail is a bit sluggish while apartments are strong with some condo conversions reverting to rental,” he said.  “We expect fundamentals to remain basically sound for the commercial sectors.”

Outside of the hospitality sector, a record $157.0 billion was invested in commercial real estate in the first four months of 2007, up from $97.0 billion in same period in 2006; that total does not include transactions valued at less than $5 million.

Cindy Chandler of Charlotte, N.C., chair of the Realtors Commercial Alliance, said investors clearly like the office market.  “So far this year, 60 percent of all commercial real estate purchases have been in the office sector,” she said.  “We expect the flow of capital into commercial sectors to remain strong throughout the year, driven by large portfolio transactions and REIT privatizations, as investors continue to value diversification.  This could make 2007 another record year for commercial investment.”

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

Office Market

Pent-up demand for quality office space has driven construction in many areas, while space in older properties sometimes is left vacant for some period of time, resulting in sluggish absorption where there is a clear preference for quality space.  Some of the older space is being marketed aggressively with generous improvement packages.

Office vacancies are projected to increase to an average of 13.3 percent by the fourth quarter of this year from 12.6 percent in the final quarter of 2006.  Annual rent growth in the office sector is expected to be 4.1 percent this year after rising 5.6 percent in 2006.

Projections for the second quarter show areas with the lowest office vacancies include New York City; Ventura County, Calif.; Honolulu; Orange County, Calif.; Los Angeles; and Miami, all with vacancy rates of 9.7 percent or less.

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 forecast at 44.4 million square feet in 2007 compared with 76.4 million last year.

Office building transaction volume in the first four months of this year totaled $95.0 billion, a record for the four-month period.  Equity funds accounted for 53 percent of office building purchases.   Markets with the highest transaction volume were Manhattan, Chicago, Northern Virginia and San Francisco.

Industrial Market 

Booming trade continues to bolster the demand for warehouse and distribution facilities across the country, with the strongest demand in coastal markets followed by inland ports and distribution hubs.  There is significant construction of build-to-suit industrial projects, while obsolete structures are being converted to other uses in stronger markets.

Vacancy rates in the industrial sector are likely to average 9.3 percent by the fourth quarter, slightly below the 9.4 percent rate at the end of 2006.  Annual rent growth should be 3.0 percent by the end of this year, up from a 1.4 percent annual rise in the fourth quarter of 2006.

The areas with the lowest industrial vacancies include Los Angeles; Orange County, Calif.; San Francisco; Tampa; Albuquerque; and Portland, Ore., all with vacancy rates of 5.3 percent or less.  Elsewhere, the slowdown in the automotive industry is hurting some markets.

Net absorption of industrial space in 58 markets tracked will probably total 162.9 million square feet in 2007, down from 202.8 million last year.

Industrial transaction volume in the first four months of 2007 was $11.9 billion, down 13 percent from the same period in 2006.

Retail Market

Same-store retail sales are decelerating, which is dampening the demand for retail space.

Vacancy rates in the retail sector are estimated to rise to 8.6 percent in the fourth quarter from 8.1 percent at the end of 2006.  Average retail rent is forecast to rise 2.4 percent in 2007, following a 4.1 percent increase last year.

Retail markets with the lowest vacancies include San Francisco; Orange County, Calif.; Miami; San Jose, Calif.; Las Vegas; and Washington, D.C., all with vacancy rates of 5.4 percent or less.

Net absorption of retail space in 54 tracked markets is expected to be 15.7 million square feet this year, up from 10.6 million in 2006.

Retail transaction volume doubled in the first four months of this year to a total of $27.7 billion, in contrast with the same period in 2006.  Institutional investors and foreign investors together accounted for 60 percent of transaction volume.

Multifamily Market

In many areas, buildings constructed as condos are now being turned into rental projects.  The demand for apartments remains strong, but new supply is essentially matching leasing activity.

In the apartment rental market – multifamily housing – vacancy rates are projected to average 5.8 percent in the fourth quarter, almost unchanged from 5.9 percent in the fourth quarter of 2006.  Average rent should increase 2.1 percent in 2007, after a 4.1 percent rise last year.

Multifamily net absorption is likely to total 212,300 units in 59 tracked metro areas this year, down from 229,300 in 2006.

The areas with the lowest apartment vacancies include Northern New Jersey; Pittsburgh; Salt Lake City; San Jose; San Francisco and Norfolk, Va., all with vacancy rates of 2.7 percent or less.

Multifamily transactions in the first four months of this year totaled $23.2 billion, down 25 percent from the same period in 2006.  Essentially half of the purchases were by private investors; condo converters accounted for only 5 percent of acquisitions.