Commercial real estate seeing weak growth, modest improvements on the way?

Milwaukee apartments under construction, photo by Jeramey Jannene.

NAR commercial outlook is hopeful

Commercial real estate vacancy rates are flat, according to the National Association of Realtors (NAR), and because unemployment remains high and the economy remains weak, growth projections have been “weaker than expected,” but the Association is projecting “modest improvements” over the coming year.

NAR reports that construction is “nearly nonexistent in most areas, and it is a buyer’s market for development acquisitions. Local experts said commercial office and industrial prices are below construction costs in 83 percent of markets.”

Dr. Lawrence Yun, NAR chief economist, said the weakening economy will slow the growth in demand for space. “Disappointing economic growth in recent months means a slower recovery for most of the commercial real estate sectors, although multifamily housing continues to benefit from pent-up demand resulting from an abnormal slowdown in household formation in recent years. Many young people, who normally would have struck out on their own from 2008 to 2010, had been doubling up with roommates or moving back into their parents’ homes. However, they’ve been entering the rental market as new households in stronger numbers this year. As a result, apartment vacancy rates are declining and rents are rising at faster rates.”

Multifamily market

Dr. Yun says multifamily is already seeing a healthy recovery as rents rise, a phenomena that is interesting as rents typically “correspond to rising home prices,” he noted. “This isn’t happening in this recovery because buyers are constrained by unnecessarily restrictive mortgage underwriting standards, so the underlying demand isn’t drawing inventory down quickly enough to support price growth.”

Although rents are projected to rise for multifamily housing, national vacancy rates are projected to drop from 5.5 percent in the current quarter to 4.6 percent in the third quarter of 2012, making it a “landlord’s market” according to NAR. Currently, the three cities with the lowest vacancy rates are Portland at 2.9 percent, New York City at 2.8 percent and Minneapolis at only 2.5 percent.

Office market

Like multifamily, office vacancy rates are dropping as well, although only moderately. NAR projects that vacancies for the office sector will drop from 16.6 at its current rate to 16.3 percent in the third quarter of 2012. Rents are also expected to rise 0.8 percent in 2011 and 1.5 percent in 2012. The three markets with the lowest vacancy rates are now Long Island with 13 percent, New York City with 10.1 percent and Washington, D.C. with 8.6 percent.

Industrial Market

In the industrial sector, rates are projected to drop from the current rate of 12.7 percent to 12.1 percent in the third quarter of 2012. Interestingly, NAR predicts rents will dip 0.9 percent in 2011 but rise two percent in 2012. The three markets with the lowest vacancy rates are now Miami at 8.9 percent, Orange County (CA) at 6.2 percent and Los Angeles with only 5.5 percent.

Retail market

Retail vacancy rates are projected to drop from the current rate of 12.9 percent to 12.2 percent in the third quarter of 2012 and like industrial, rents are projected to see a slight reduction of 0.4 percent this year before a 0.7 percent rise in 2012. The five markets with lowest retail vacancy rates are
Markets with the lowest retail vacancy rates currently include San Francisco, 3.8 percent; Northern New Jersey, 6.1 percent; and three markets at 6.4 percent each: Los Angeles; Long Island, N.Y.; and San Jose, Calif.