Commercial Real Estate Improving With Record Inves
Washington, DC, March 15, 2006--Rising demand for space is improving commercial real estate markets, and investment dollars flowed into commercial sectors at record levels in 2005, according to the latest Commercial Real Estate Outlook of the National Association of Realtors.
David Lereah, NAR’s chief economist, said the fundamentals are solid. “Vacancy rates are declining in all of the major commercial sectors, and rents are rising at healthy rates,” he said. “Job growth and international trade are fueling demand for space and facilities.”
NAR President Thomas M. Stevens from Vienna, Va., said the flow of funds into commercial real estate is extraordinary. “Investment grade real estate has been changing hands at unprecedented rates, which demonstrates that the value of portfolio diversification into commercial real estate is being embraced strongly in the investment marketplace,” said Stevens, senior vice president of NRT Inc.
Investment in commercial real estate rose 44 percent in 2005 to a record $268 billion of investment grade real estate, not counting transactions valued at less than $5 million.
“Many members of the National Association of Realtors® underscore this wisdom in their own investments – 13 percent hold an ownership interest in at least one commercial structure, and 39 percent own residential properties for investment in addition to their primary residence or vacation home,” Stevens said.
The NAR forecast, expanded to five major commercial sectors, includes analysis of year-end data for various tracked metro areas. The sectors include the office, industrial, retail, multifamily and hospitality markets. Metro data were provided by Torto Wheaton Research and Real Capital Analytics.
By the end of this year, office vacancy rates are projected to drop to an average of 11.0 percent from 13.6 percent in the fourth quarter of 2005. Office rents are expected to rise 5.0 percent in 2006.
Office vacancies are at the lowest level since 2001. Markets with a wide pool of skilled workers will experience the strongest demand for space in 2006, as will areas with a rapid in-migration of population.
Areas with the lowest office vacancies currently include Ventura County, Calif.; Orange County, Calif.; Riverside, Calif.; New York City; and Miami, all with vacancy rates of 8.5 percent or less.
Net absorption of office space in 56 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 93.4 million square feet in 2006, up from 89.1 million last year.
Nearly $100 billion of investment grade office buildings traded hands in 2005. The top suburban office markets for investment are Los Angeles; Northern Virginia; Orange County, Calif.; Dallas; and Northern New Jersey.
Retail Market
The retail sector has undergone significant changes recently with megamergers that will continue to impact markets across the country. This includes mergers of Sears and K-Mart, and May Department Stores with Federated Department stores. In some areas, new space is being built without sufficient demand, but retail space absorption will slightly outpace the amount of new space brought to market this year.
Retail vacancy rates are forecast to decline to an average of 7.8 percent by the end of the year from 8.0 percent in the fourth quarter of 2005, and average rent should rise 4.0 percent in 2006.
Retail markets expected to have the lowest vacancies this year include San Francisco, Las Vegas, San Diego, Seattle and West Palm Beach, which are seen to have year-end vacancies of 3.4 percent or less.
Net absorption of retail space in 54 tracked markets is likely to be 31.4 million square feet in 2006, down from 43.8 million last year.
