Daily Real Estate News  |  June 13, 2007  |   Commercial Real Estate Hits Record Levels
Investment in commercial real estate remains at record levels with sound fundamentals in most sectors, according to the latest Commercial Real Estate Outlook of the NATIONAL ASSOCIATION OF REALTORS®.

In a nutshell, Lawrence Yun, NAR senior economist, says: "The overall office market has been booming, the industrial sector is holding its own, retail is a bit sluggish, while apartments are strong with some condo conversions reverting to rental."

Outside of the hospitality sector, a record $157 billion was invested in commercial real estate in the first four months of 2007, up from $97 billion in the same period in 2006. That total does not include transactions valued at less than $5 million.

In particular, Cindy Chandler of Charlotte, N.C., chair of the REALTORS^® Commercial Alliance, says investors clearly like the office market.

“So far this year, 60 percent of all commercial real estate purchases have been in the office sector,” she says. “We expect the flow of capital into commercial sectors to remain strong throughout the year, driven by large portfolio transactions and REIT privatizations, as investors continue to value diversification. This could make 2007 another record year for commercial investment.”

Breakdown by Commercial Sector

The NAR forecast for four major commercial sectors — office, industrial, retail, and multifamily markets — includes analysis of quarterly data for various tracked metro areas. (NAR gathered metro data from Torto Wheaton Research and Real Capital Analytics.)

1. Office Markets

Pent-up demand for quality office space has driven construction in many areas, while space in older properties sometimes is left vacant for some period of time, resulting in sluggish absorption where there is a clear preference for quality space. Some of the older space is being marketed aggressively with generous improvement packages.

Office building transaction volume in the first four months of this year totaled $95 billion, a record for the four-month period. Equity funds accounted for 53 percent of office building purchases. Markets with the highest transaction volume were Manhattan, Chicago, Northern Virginia, and San Francisco.

The Forecast:

• Office vacancies are projected to increase to an average of 13.3 percent by the fourth quarter of this year from 12.6 percent in the final quarter of 2006.
• Annual rent growth in the office sector is expected to be 4.1 percent this year after rising 5.6 percent in 2006.
• Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 44.4 million square feet in 2007 compared with 76.4 million last year.

Areas with the lowest office vacancies: New York City; Ventura County, Calif.; Honolulu; Orange County, Calif.; Los Angeles; and Miami, are projected for the second quarter to all have vacancy rates of 9.7 percent or less.

2. Industrial Markets

Booming trade continues to bolster the demand for warehouse and distribution facilities across the country, with the strongest demand in coastal markets followed by inland ports and distribution hubs. There is significant construction of build-to-suit industrial projects, while obsolete structures are being converted to other uses in stronger markets.

Industrial transaction volume in the first four months of 2007 was $11.9 billion, down 13 percent from the same period in 2006.

The Forecast:

• Vacancy rates in the industrial sector are likely to average 9.3 percent by the fourth quarter, slightly below the 9.4 percent rate at the end of 2006.
• Annual rent growth should be 3 percent by the end of this year, up from a 1.4 percent annual rise in the fourth quarter of 2006.
• Net absorption of industrial space in the 58 markets tracked will probably total 162.9 million square feet in 2007, down from 202.8 million last year.

Areas with the lowest industrial vacancies: Los Angeles; Orange County, Calif.; San Francisco; Tampa; Albuquerque; and Portland, Ore., all with vacancy rates of 5.3 percent or less. Elsewhere, the slowdown in the automotive industry is hurting some markets.

3. Retail Markets

Same-store retail sales are decelerating, which is dampening the demand for retail space. However, retail transaction volume doubled in the first four months of this year to a total of $27.7 billion, in contrast with the same period in 2006. Institutional investors and foreign investors together accounted for 60 percent of transaction volume.

The Forecast:

• Vacancy rates in the retail sector are estimated to rise to 8.6 percent in the fourth quarter from 8.1 percent at the end of 2006.
• Average retail rent is forecast to rise 2.4 percent in 2007, following a 4.1 percent increase last year.
• Net absorption of retail space in 54 tracked markets is expected to be 15.7 million square feet this year, up from 10.6 million in 2006.

Retail markets with the lowest vacancies: San Francisco; Orange County, Calif.; Miami; San Jose, Calif.; Las Vegas; and Washington, D.C., all with vacancy rates of 5.4 percent or less.

4. Multifamily Markets

In many areas, buildings constructed as condos are now being turned into rental projects. The demand for apartments remains strong, but new supply is essentially matching leasing activity. Multifamily transactions in the first four months of this year totaled $23.2 billion, down 25 percent from the same period in 2006. Essentially half of the purchases were by private investors; condo converters accounted for only 5 percent of acquisitions.

The Forecast:

• In the apartment rental market — multifamily housing — vacancy rates are projected to average 5.8 percent in the fourth quarter, almost unchanged from 5.9 percent in the fourth quarter of 2006.
• Average rent should increase 2.1 percent in 2007, after a 4.1 percent rise last year.
• Multifamily net absorption is likely to total 212,300 units in 59 tracked metro areas this year, down from 229,300 in 2006.

Areas with the lowest apartment vacancies: Northern New Jersey; Pittsburgh; Salt Lake City; San Jose; San Francisco and Norfolk, Va., all with vacancy rates of 2.7 percent or less.

— REALTOR® Magazine Online

For more housing market statistics and research reports, visit NAR's Research Department at REALTOR.org.