Washington, DC, December 14, 2006--The commercial real estate markets are continuing to grow with record investment, and individual sectors in many areas are seeing tighter vacancy rates and higher rents, according to the latest Commercial Real Estate Outlook of the National Association of Realtors.
David Lereah, NAR’s chief economist, said performance varies among the commercial sectors. “The office and industrial markets continue to shine, supported by job growth and trade, while the rental apartment sector is seeing healthy rent increases,” he said. “The retail sector is essentially flat, but the hotel industry is doing better than at any time since 2001.”
James Marrelli, NAR vice president of commercial real estate, said there is a record flow of capital into commercial real estate. “We’re setting another record this year for investment in commercial real estate,” he said. “Institutional investors, pension funds and foreign investors have focused on commercial grade properties to diversify portfolio assets, with expectations of solid long-term gains.”
Outside of the hotel sector, over $236.0 billion in commercial real estate transaction volume was recorded in the first ten months of 2006, up from $231.9 billion in the same period of 2005, not including properties valued at less than $5 million.
The NAR forecast for five major commercial sectors includes analysis of quarterly 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.
A reduction in speculative construction of new office space, along with growth in office jobs, means there are positive fundamentals for most market areas. Office vacancy rates are projected to drop to an average of 12.1 percent in the fourth quarter of 2007 from an estimated 12.9 percent currently--the lowest since 2001; at the end of 2005 they were 13.6 percent. Annual rent growth in the office sector next year is expected to be 5.2 percent, after rising 4.3 percent in 2006.
Areas with the lowest office vacancies currently include New York City; Ventura County, Calif.; Miami; Orange County, Calif.; Honolulu; and Riverside, Calif., all with vacancy rates of 8.9 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 likely to be 71.7 million square feet in 2007, compared with 73.7 million this year.
Office building transaction volume in 2006 has been fueled by portfolio acquisitions, privatization of Real Estate Investment Trusts (REITs) and mergers within commercial real estate. Office buildings this year have accounted for 48 percent of the transaction volume in all commercial sectors, with more than $105 billion trading hands in the first 10 months of 2006, a 36 percent increase over the same period last year.
Trade is continuing to drive warehouse space, creating a landlord’s market in many areas around the country. Available space is the tightest the market has seen since 2001. Vacancy rates in the industrial sector are forecast to average 9.0 percent in the fourth quarter of 2007, down from 9.5 percent in the current quarter. Annual rent growth should be 3.8 percent by the end of next year, in contrast with a 1.7 percent annual increase in the current quarter.
Trade with China in particular is impacting demand on both coasts. Traffic in Southern California is so congested that ships are traveling through the Panama Canal to get their cargo to East Coast markets, notably in Florida.
The areas with the lowest industrial vacancies currently are West Palm Beach, Fla.; Los Angeles; Miami; Orange County, Calif.; Fort Lauderdale, Fla.; and Tampa, all with vacancy rates of 5.5 percent or less.
