Commercial real estate: all sectors now recovering

Commercial real estate improving, but slowly

According to the National Association of Realtors’ Commercial Real Estate Outlook released this morning, the commercial real estate sector is recovering, albeit slowly, which they say is due to gradual economic improvement and job creation which drives absorption of space.

The bright spot in the sector has long been multifamily, as the recent CoStar Commercial Repeat Sale Indices asserts that pricing for the ten markets in the prime multifamily index having regained pre-recession peak levels, due to investor interest in the sector. As prices have risen, construction levels have followed, with double the number of units delivered in 2012 compared to 2011, with 2013 set to outpace both years.

There is a growing consensus among investors and advisers that Real Estate Investment Trusts (REITS) are a quality investment as they are in good shape and buildings can be purchased at a discount. This attitude has certainly helped to fuel the investment in and performance of multifamily.

Dr. Lawrence Yun, NAR chief economist, said rental housing demand has been exceptionally strong. “Rent increases have been higher in multifamily housing where supply is not matching strong demand, thereby allowing landlords to raise rents at faster rates. Overall commercial real estate leasing activity continued to grow in most markets during the closing months of 2012, which is modestly lowering vacancy rates in all of the commercial sectors early this year.”

Commercial real estate forecast: key statistics

Key stats from the NAR’s Commercial Real Estate Outlook:

1. In 2013, national vacancy rates are forecast to drop 0.4 percent in the office market, 0.4 point in industrial, 0.3 point for retail and 0.1 point in multifamily.
2. Office sector: vacancy rates are expected to fall from a projected 16.0 percent in the first quarter to 15.6 percent in the first quarter of 2014, and rents should increase 2.6 percent in 2013 and 2.8 percent next year, following a 2.0 percent gain in 2012.
3. Industrial: vacancy rates are projected to drop from 9.6 percent in the first quarter of this year to 9.2 percent in the first quarter of 2014, and rents should rise 2.3 percent this year and 2.6 percent in 2014, after increasing 1.7 percent last year.
4. Retail: NAR projects vacancy rates will slide from 10.7 percent to 10.4 percent between now and the first quarter of 2014, as rents rise 1.5 percent in 2013 and 2.1 percent next year, following a 0.8 percent gain in 2012.
5. Multifamily: it’s a landlord’s market, the trade group says, as vacancy rates slide from 4.0 percent to 3.9 percent within 12 months, with rents expected to increase 4.6 percent this year and 4.7 percent in 2014, after rising 4.1 percent in 2012.

“Assuming there is no fiscal cliff”

Dr. Yun said last fall that the market has been slowly building momentum. “Job creation is the key to increasing demand in the commercial real estate sectors.”

“The economy is expected to grow 2.5 percent [in 2013],” Dr. Yun added, “and with modest job creation, assuming there is no fiscal cliff, the demand for commercial space will gradually rise. The greatest friction that remains is a tight credit environment, notably for smaller properties.”