The commercial real estate market is improving and vacancy rates are expected to decline in all four commercial market sectors this year, according to the NATIONAL ASSOCIATION OF REALTORS®' Commercial Real Estate Spotlight report.

David Lereah, NAR's chief economist, says commercial markets have gained momentum. "With vacancy rates in all sectors going down, the fundamentals for commercial real estate are improving, and investors have been moving more dollars into this asset class," he says. "In fact, we expect vacancy rates to trend downward over the next two years."

In tracking major purchases, commercial real estate experienced a 53 percent increase in transaction volume last year in comparison with 2003; multifamily housing and office properties experienced the biggest gains.

For all sectors, commercial investment totaled $181.4 billion in 2004 compared with $118.8 billion in 2003. These figures don't include transactions for properties costing under $5 million.

Foreign investors spent more than $12 billion on U.S. commercial real estate last year, with three-fourths of that investment in office property. Real estate investment trusts (REITs) focused on the retail sector, accounting for nearly 14 percent of retail transaction volume.

NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City, says improvements in the commercial market typically lag an overall economic recovery. "Even with healthy economic growth over the last couple years, job creation really didn't pick up until 2004," he says. "Those jobs have fueled the need for commercial space, so the market is on solid ground and is experiencing a growing demand."

NAR's forecast for four major commercial sectors is based on analysis of data in 57 metro areas, including the office, retail, industrial, and multifamily markets. The forecast was produced with data provided by Torto Wheaton Research and Real Capital Analytics.

New York Boasts Low Office Vacancies

Office vacancy rates in the 57 markets tracked are forecast to decline to 14.2 percent this year from 15.4 percent in 2004. Office rents should rise by 2.8 percent in 2005, after rising only 0.4 percent last year. Increased absorption of space and a slowdown in the amount of new space coming on the market are improving office fundamentals.

Areas with the lowest office vacancies include New York City; Long Island, N.Y.; Ventura County, Calif.; Washington, D.C.; and Orange County, Calif., all with vacancy rates of 11.0 percent or less.

Net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, is projected at 61.0 million square feet in 2005, down from 77.7 million last year, but is triple the 20.0 million square feet absorbed in 2003.

Retail Sector Could See Store Closings

In the retail sector, merger activity could lead to some store closings. Even so, the average vacancy rate is projected to drop to 6.5 percent this year from 7.5 percent in 2004. Retail rent growth is forecast at 4.8 percent in 2005, up from 3.3 percent last year.

Retail markets with the lowest vacancies include Washington, D.C.; Oakland, Calif.; San Diego; Nashville, Tenn.; and Portland, Ore., with vacancy rates of 3.8 percent or less.

Net absorption of retail space in the 57 metro areas tracked is estimated at 34.9 million square feet in 2005, up strongly from 27.1 million last year.

Industrial Vacancy Rate to Dip 10.4%

In the industrial market, demand for warehouse and distribution space has fueled demand across the country. The national vacancy rate is expected to decline to 10.4 percent this year from 10.9 percent in 2004.

Industrial rents, which slipped 0.6 percent last year, should rise 0.7 percent in 2005. The areas with the lowest industrial vacancies are Los Angeles; Long Island, N.Y.; Riverside, Calif.; Orange County, Calif.; and West Palm Beach, Fla., with vacancy rates of 6.8 percent or less.

Net absorption of industrial space is forecast at 134.8 million square feet this year in the 57 markets tracked, down from 176.5 million in 2004, but well above a sparse 16.5 million square feet absorbed in 2003.

Average Rents Forecast to Rise

The apartment rental market-multifamily housing-should see a decline in the average vacancy rate to 6.1 percent this year from 6.2 percent in 2004 as space absorption keeps pace with new supply. Even so, higher homeownership rates are dampening the performance in some areas.

Average rent is forecast to rise 2.1 percent this year, following a 1.5 percent rise in 2004. Areas with the lowest apartment vacancies are Northern New Jersey; West Palm Beach, Fla.; Los Angeles; San Diego; and Fort Lauderdale, Fla., with vacancy rates of 3.5 percent or less.

Multifamily net absorption is projected at 238,600 units in the 57 markets tracked in 2005, down from 264,300 last year, but much stronger than the 159,400 units absorbed in 2003.

The Commercial Real Estate Spotlight is published quarterly by the NAR Research Division for the REALTORS® Commercial Alliance. The RCA, formed by NAR in 1999, serves the needs of the commercial market and the commercial constituency within NAR, including commercial members; commercial committees, subcommittees, and forums; commercial real estate boards and structures; and NAR affiliate organizations.
 
Source: Realtor Magazine