Commercial real estate improving, but there’s a big catch
According to the National Association of Realtors’ (NAR’s) quarterly commercial real estate forecast, market fundamentals like vacancy rates and rents have improved, but financing continues to be the pestering challenge for the sector. NAR reports vacancy rates over the coming year are expected to decline 0.1 percentage point in the office market, 0.5 point in industrial, and 0.3 point for retail; however, the average multifamily vacancy rate is forecast to rise 0.2 percentage point, with that sector still showing the tightest availability and biggest rent increases.
Dr. Lawrence Yun, NAR chief economist, said the market is showing an uneven recovery. “The wheels appear to be greased for the big players, but not so much for small business,” Yun observed. “Overall, the commercial sectors are firming nicely, with multifamily continuing to show the best performance.”
Property size a major factor
Separately, the Commercial Real Estate 2013 Lending Survey, shows widely varying availability of lending capital depending on property size, with a significant disadvantage for buyers of smaller properties.
Sales volume of commercial properties valued over $2.5 million rose 35 percent in the first quarter compared to the first quarter of 2012, and 16 markets saw triple digit gains during this period.
Realtor commercial members report 85 percent of their clients’ transactions are for purchases under $2 million – generally small businesses, and as these transactions are financed largely by private investors, along with local and regional banks, NAR says this marks a bifurcation in capital availability based on property value.
Financing remains unnecessarily tight
“Despite the improvement for major commercial properties, 52 percent of Realtors report they had a commercial transaction fail in the past year due to a lack of financing,” Dr. Yun said. “In addition, 42 percent of respondents said clients failed to complete a refinancing. Credit for small business remains unnecessarily tight.”
“Commercial members report that new and proposed U.S. legislative and regulatory initiatives, and regulatory uncertainty for financial institutions, account for the lack of capital in commercial lending for smaller properties,” NAR reports.
Forecasting various sectors
NAR forecasts that multifamily vacancy rates will rise from 3.9 percent in the second quarter of this year to 4.1 percent in the second quarter of 2014 while rents are projected to increase 4.6 this year and another 4.6 in 2014. Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.0 percent; New York City, 2.2 percent; and Minneapolis and San Diego, each at 2.3 percent.
Office vacancy rates are projected to drop from 15.7 percent in the second quarter of this year to 15.6 percent in 2014 as rents are forecast to rise 2.6 percent this year and another 2.8 percent in 2014. Currently, the markets with the lowest office vacancy rates are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 9.9 percent; Little Rock, Ark., 12.0 percent; and Birmingham, Ala., 12.3 percent.
Industrial vacancy rates are expected to slide from 9.4 percent in the second quarter of this year to 8.9 percent in the second quarter of 2014 as rents rise 2.4 percent in 2013 and 2.6 percent in 2014. The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.9 percent; Los Angeles, 4.1 percent; Miami, 5.8 percent; and Seattle at 6.3 percent.
Retail vacancy rates are projected to drop from 10.5 percent in the second quarter of 2013 to 10.2 percent in the second quarter of 2014 as rents rise 1.4 percent this year and another 2.2 percent next year. Presently, markets with the lowest retail vacancy rates include San Francisco, 3.6 percent; Fairfield County, Conn., at 4.1 percent; and Long Island, N.Y., and Orange County, Calif., each at 5.3 percent.