NAR Economist Sees Improving Commercial Market

Washington, DC, May 13, 2011 -- The commercial real estate market continues a slow pace toward recovery, with occupancy rates rising in the office and industrial properties in most major cities supported by rising employment and restocking of wholesale inventory, according to National Association of Realtors chief economist Lawrence Yun.

At the "Economics Issues and Commercial Business Trends Forum," Yun identified bright spots and challenges within the commercial sector.

In the second half of 2010, realtors reported seeing more movement in the commercial market. Yun said this movement is occurring as property prices have fallen, providing attractive returns on investment.

However, tightened lending standards continue to pose a challenge because national banks are still hesitant to lend.

"Lending from regional banks has become an important source of funds. The lending from big banks remained sluggish," said Yun.

"Investment funds through private equity and real estate investment trusts will play a bigger role as the commercial mortgage-backed securities market struggles to recover."

However, movement in the commercial sector hasn't translated into increased prices as the properties values are being dragged down by distressed properties.

Yun said it could be several years before commercial property prices rise in any meaningful way, though some prime class-A properties in sought-after markets like Washington and New York have already started showing price recovery.

The apartment sector remains the strongest with solid net absorption and rents expected to increase 4 percent nationally in 2011 and 5 percent in 2012. In metropolitan areas like Washington, rents could rise close to double digit rate of appreciation.

Interest rates are currently artificially low and unsustainable, and Yun expects the rate of inflation to increase to 3 or 4 percent by the end of 2011 and up to 5 percent by 2012 if gas prices do not retreat.