Commercial Market Recovery Remains Uneven
SAN FRANCISCO (November 8, 2013) – After several years of slow-moving growth the commercial real estate market is in a recovery mode as transaction volume increased 27 percent over a year ago and prices display solid gains, said National Association of Realtors® Chief Economist Lawrence Yun during a commercial real estate forum at the 2013 REALTORS® Conference & Expo in San Francisco today.
While the overall commercial sector appears to be improving, Yun said this isn’t the case in all parts of the market. “Realtors® involved in commercial real estate have reported they’re still seeing little improvement,” said Yun. “Commercial members typically handle smaller transactions, properties under $1 million; this part of the market is moving incrementally. At the opposite end, expensive properties priced above $2 million are doing much better. What we’re seeing is two very distinct markets within the commercial sector.”
Yun said the apartment sector continues to perform better than other sectors in commercial real estate. Prices are increasing and vacancy rates are decreasing. He predicts the rental population will continue to rise over the next five years because of an increase in household formation. Areas of the country where apartment vacancy rates are especially low are New York City and San Diego; cities where vacancy rates remain high are Houston and Memphis, Tenn.
Office vacancy rates are also decreasing, and rents have recently turned the corner and are positive. Yun pointed out that while companies are hiring more people, office space is not increasing. He said this might be due to employees sharing office space; however, Yun predicts this trend can’t continue. As hiring increases, net absorption will increase as well. The markets with the lowest office vacancy rates are Washington, D.C. and New York City and cities with the highest are Detroit and Dayton, Ohio.
The retail sector has experienced a modest increase in rents, as well as a slight decrease in vacancy rates. Markets with low retail vacancy rates include San Francisco and Long Island and ones with high rates are Dayton and Tulsa, Okla. Yun says retail spending is determined by consumer confidence, which is in turn determined by housing prices. With housing prices increasing, Yun predicts retail spending will improve.
In the industrial sector vacancy rates have declined while rents remain positive. Markets with low industrial vacancy rates are Orange County and Los Angeles, while markets with high vacancy rates are Boston and San Jose, Calif.
Yun said the economy is growing, but doing so at an unimpressive rate. “The pace of expansion has been frustrating,” he said. “Job growth is slow and consumers have held back on their spending.”
Seven million jobs have been recovered over the past four years, yet Yun predicts we need another 6 to 8 million to be back on track. Consumer confidence is also stuck at low levels. While consumers remain optimistic about the present, they are not confident about what the economic future holds.
Richard Whitsell, president and CEO of Fresno First Bank, also spoke at the commercial forum. Whitsell touched on a number of issues affecting small banks and discussed their impact on the commercial real estate market. He said some of the challenges affecting small banks as a result of the economic downturn are increased regulatory scrutiny and regulations, as well as pressure on capital requirements.
According to NAR data, commercial members receive their financing from mostly regional and local banks, as well as credit unions. Many have reported that it’s still difficult to receive credit because of regulatory conditions and uncertainty. Whitsell pointed out that recent legislative and regulatory impacts, such as those from Dodd-Frank, have made it difficult to bring capital into the commercial real estate market. Since regulations haven’t been fully implemented yet, Whitsell said it’s hard to tell the full impact it will have on loans.
Whitsell discussed a number of ways local banks are different from major banks. One of those is their ability to be more flexible with loan terms and conditions, as well as their reliance on a borrower’s trust and character.
“Our decision process on whether to approve a loan is different than if someone walked into a major bank,” he said. “We rely on local business members to help us make the decision. Fortunately we can also be more flexible on the terms and conditions of a loan. As a local bank we look at it as we’re in this together with the borrower.”
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.