Pleasanton Weekly

Real Estate - December 2, 2011

Growth seen in commercial real estate market

Vacancy rates still trending lower, but should rise modestly in 2012

by Jeb Bing

Commercial real estate markets have been relatively flat this year, but improving fundamentals mean a more positive trend is expected in 2012, according to the National Association of Realtors.

Lawrence Yun, NAR chief economist, said there is little change in most of the commercial market sectors.

"Vacancy rates are flat, leasing is soft and concessions continue to make it a tenant's market," he said. "However, with modest economic growth and job creation, the fundamentals for commercial real estate should gradually improve in the coming year."

The commercial real estate market is expected to follow the general economy.

"Vacancy rates are expected to trend lower and rents should rise modestly next year," Yun said. "In the multifamily market, which already has the tightest vacancy rates in any commercial sector, apartment rents will be rising at faster rates in most of the country next year. If new multifamily construction doesn't ramp up, rent growth could potentially approach 7% over the next two years."

Looking at commercial vacancy rates from the fourth quarter of this year to the fourth quarter of 2012, NAR forecasts vacancies to decline 0.6% in the office sector, 0.6% in industrial real estate, 0.8% in the retail sector, and 0.7% in the multifamily rental market.

The Society of Industrial and Office Realtors, in its Commercial Real Estate Index, an attitudinal survey of 231 local market experts, shows the broad industrial and office markets were relatively flat in the third quarter, in step with macroeconomic trends.

The national economy continues to affect the sectors, with 92% of respondents reporting the economy is having a negative impact on their local market.

Even so, the SIOR index, measuring the impact of 10 variables, rose 0.6% to 55.5 in the third quarter, following a decline of 2.6% in the second quarter. In a split from the recent past, the industrial sector advanced while the office sector declined.

The SIOR index is notably below the level of 100 that represents a balanced marketplace, but had seen six consecutive quarterly improvements before the last two quarters. The last time the index reached the 100 level was in the third quarter of 2007.

Construction activity remains low, with 96% of respondents indicating that it is lower than normal; 88% said it is a buyers' market in terms of development acquisitions. Prices are below construction costs in 83% of markets.

NAR's latest Commercial Real Estate Outlook offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., a source of commercial real estate performance information.

Office Markets:

Vacancy rates in the office sector are expected to fall from 16.7% in the current quarter to 16.1% in the fourth quarter of 2012.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.3%; New York City, at 10.3%; and New Orleans, 12.8%.

After rising 1.4% in 2011, office rents are forecast to increase another 1.7% next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be 20.2 million square feet this year and 31.7 million in 2012.

Industrial Markets:

Industrial vacancy rates are projected to decline from 12.3% in the fourth quarter of this year to 11.7% in the fourth quarter of 2012.

The areas with the lowest industrial vacancy rates currently are Los Angeles, with a vacancy rate of 5.2%; Orange County, 5.7%; and Miami at 8.4%.

Annual industrial rent should decline 0.5% this year before rising 1.8% in 2012. Net absorption of industrial space nationally should be 62.0 million square feet this year and 41.2 million in 2012.

Retail Markets:

Retail vacancy rates are likely to decline from 12.6% in the current quarter to 11.8% in the fourth quarter of 2012.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.7%; Long Island, N.Y., and Northern New Jersey, each at 5.7%; and San Jose, at 6.0%.

Average retail rent is seen to decline 0.2% this year, and then rise 0.7% in 2012. Net absorption of retail space is seen at 1.2 million square feet this year and 13.5 million in 2012.

Multifamily Markets:

The apartment rental market -- multifamily housing -- is expected to see vacancy rates drop from 5.0% in the fourth quarter to 4.3% in the fourth quarter of 2012. Multifamily vacancy rates below 5% generally are considered a landlord's market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are Minneapolis, 2.4%; New York City, 2.7%; and Portland, Ore., at 2.8%.

Average apartment rent is projected to rise 2.5% this year and another 3.5% in 2012. Multifamily net absorption is likely to be 238,400 units this year and 126,600 in 2012.

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