Most Commercial Real Estate Sectors Continue to Im
Washington, DC, September 12, 2006--Most commercial real estate markets can expect tightening vacancy rates and rising rents, and large investors are pouring funds into commercial sectors, according to the latest Commercial Real Estate Outlook of the National Association of Realtors.
David Lereah, NAR’s chief economist, said most commercial market fundamentals are solid. “Commercial real estate markets move in response to changes in fundamental demand, which remains solid as a result of sustained job creation and economic growth,” he said. “Except for some weakness in the retail sector, the commercial market is benefiting from lower vacancies and higher rents.”
Institutional investors have been very active in commercial real estate this year. “Large institutional investors such as pension funds and life insurance companies are considered to be cautious and risk adverse, so their shift of funds into commercial sectors is an affirmation of the wisdom of diversification in commercial real estate,” Lereah said.
Institutional investors and private equity funds accounted for half of all office buildings purchased during the first seven months of 2006, and also purchased one-third of industrial real estate. These institutions spent over $31.0 billion in all of the commercial sectors so far this year, which is seen to be a record for institutional investment in commercial grade properties.
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.
Office Market
With a slowdown in speculative construction, office market vacancy rates are expected to drop to an average of 13.0 percent in the fourth quarter from 13.6 percent during the same quarter of last year, and will be the lowest since 2001. Office rents are likely to rise 5.5 percent for all of 2006.
Areas with the lowest office vacancies currently include Ventura County, Calif.; New York City; Orange County, Calif.; Tucson, Ariz.; Honolulu; and Miami, all with vacancy rates of 8.3 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 projected at 74.5 million square feet this year, compared with 90.3 million in 2005.
Office building transaction volume in the first seven months of this year has risen to a record $55.7 billion, which is 12 percent higher than the same period in 2005. Markets with the highest pricing per square foot are Manhattan, Washington, D.C., and Stamford, Conn.
Industrial Market
Vacancy rates in the industrial sector should decline to an average of 9.7 percent in the fourth quarter from 9.9 percent a year earlier, and will be at the lowest level in five years; rents are forecast to rise 1.5 percent in 2006. Although the greatest demand remains in port markets, new construction is popular in secondary markets and other areas with lower land values and fewer site remediation concerns.
The areas with the lowest industrial vacancies currently are West Palm Beach, Fla.; Los Angeles; Fort Lauderdale, Fla.; Miami; Orange County, Calif.; and Tampa, all with vacancy rates of 5.5 percent or less.
Net absorption of industrial space in 54 markets tracked is expected to be 201.2 million square feet in 2006, down from 295.8 million last year.
Industrial transaction volume so far in 2006 totaled $23.6 billion, with a record possible this year. The highest industrial market rent per square foot is in San Diego; Orange Country, Calif.; and Los Angeles. The highest prices being paid for industrial properties, outside of Manhattan, are in Northern Virginia; San Jose, Calif.; and Las Vegas.
