NAR: Fundamentals Support Commercial Real Estate

Washington, DC, September 18, 2007--Most commercial real estate markets are enjoying relatively low vacancy rates and healthy rent growth from a fundamentally sound economy, according to the latest Commercial Real Estate Outlook of the National Association of Realtors.

NAR Senior Economist Lawrence Yun said, “Commercial real estate responds to economic growth and job creation, which have been fairly strong over the past two years and have created the need for additional commercial space,” he said. 

“These fundamentals will continue to support commercial real estate markets in 2008.  There has not been much overbuilding in the commercial sectors, and investors are more diverse.”

Yun said pricing for some commercial real estate has been at a record high, and capitalization rates have been at historic lows.  “Normalization of prices may be occurring, but it isn’t clear what the definition of normal might be in the current market given the repricing of risk in the capital market.  In short, the difference between the cash flow on a typical property and its price is close to a maximum, indicating prices may even out.”

A record $257 billion was invested in commercial real estate in the first seven months of 2007, up from $146.7 billion in same period in 2006. That total does not include transactions valued at less than $5 million, or of investments in the hospitality sector.

Cindy Chandler of Charlotte, N.C., chair of the Realtors Commercial Alliance, said there have been some problems recently regarding the availability of capital.  “Over-reaction to credit concerns in the financial markets could limit the availability of capital needed by private investors, but overall the situation does not appear to have significantly impacted institutional-grade commercial properties,” she said.

“We're returning to the fundamentals and deal structuring of the mid 90s, and may see some dampening in investment activity, but there is a lot of momentum in commercial real estate. 

“We see the commercial sectors holding at a healthy level of activity in most of the country, although there could be some slowing as a result of postponed transactions and delays in decision making.”