Washington, DC, March 17--The commercial real estate market is improving and vacancy rates are expected to decline in all four commercial market sectors this year, according to the National Association of Realtors Commercial Real Estate Spotlight.
David Lereah, NAR's chief economist, said commercial markets have gained momentum. "With vacancy rates in all sectors going down, the fundamentals for commercial real estate are improving and investors have been moving more dollars into this asset class," he said. "In fact, we expect vacancy rates to trend downward over the next two years."
In tracking major purchases, commercial real estate experienced a 53 percent increase in transaction volume last year in comparison with 2003; multifamily housing and office properties experienced the biggest gains. For all sectors, commercial investment totaled $181.4 billion in 2004 compared with $118.8 billion in 2003. These figures do not include transactions for properties costing under $5 million.
Foreign investors spent over $12 billion on U.S. commercial real estate last year, with three-fourths of that investment in office property. Real estate investment trusts (REITs) focused on the retail sector, accounting for nearly 14 percent of retail transaction volume.
NAR president Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City, said improvements in the commercial market typically lag an overall economic recovery. "Even with healthy economic growth over the last couple years, job creation really didn't pick up until 2004," he said. "Those jobs have fueled the need for commercial space, so the market is on solid ground and is experiencing a growing demand."
The NAR forecast for four major commercial sectors is based on analysis of data in 57 metro areas tracked, including the office, retail, industrial and multifamily markets. The forecast was produced with data provided by Torto Wheaton Research and Real Capital Analytics.
Office vacancy rates in the 57 markets tracked are forecast to decline to 14.2 percent this year from 15.4 percent in 2004. Office rents should rise by 2.8 percent in 2005, after rising only 0.4 percent last year. Increased absorption of space and a slowdown in the amount of new space coming on the market are improving office fundamentals. Areas with the lowest office vacancies include New York City; Long Island, N.Y.; Ventura County, Calif.; Washington, D.C.; and Orange County, Calif., all with vacancy rates of 11.0 percent or less.
Net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, is projected at 61.0 million square feet in 2005, down from 77.7 million last year, but is triple the 20.0 million square feet absorbed in 2003.
In the retail sector, merger activity could lead to some store closings. Even so, the average vacancy rate is projected to drop to 6.5 percent this year from 7.5 percent in 2004. Retail rent growth is forecast at 4.8 percent in 2005, up from 3.3 percent last year. Retail markets with the lowest vacancies include Washington, D.C.; Oakland, Calif.; San Diego; Nashville, Tenn.; and Portland, Ore., with vacancy rates of 3.8 percent or less.
Net absorption of retail space in the 57 metro areas tracked is estimated at 34.9 million square feet in 2005, up strongly from 27.1 million last year.
In the industrial market, demand for warehouse and distribution space has fueled demand across the country. The national vacancy rate is expected to decline to 10.4 percent this year from 10.9 percent in 2004. Industrial rents, which slipped 0.6 percent last year, should rise 0.7 percent in 2005. The areas with the lowest industrial vacancies are Los Angeles; Long Island, N.Y.; Riverside, Calif.; Orange County, Calif.; and West Palm Beach, Fla., with vacancy rates of 6.8 percent or less.
