U.S. Commercial Real Estate Vacancies to Peak in Early 2011, Says NAR

U.S. Commercial Real Estate Vacancies to Peak in Early 2011, Says NAR

Commercial News » Commercial Real Estate Edition | By Michael Gerrity | May 26, 2010 11:38 AM ET

According to the National Association of Realtors, vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the late 2010 or early 2011.

Lawrence Yun, NAR chief economist, said there is one bright spot in commercial real estate.  "The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year," he said.  "However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession.  These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011."

The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts, confirms that significant fallout from the recession remains, but to a lesser extent.

The SIOR index, measuring 10 variables, increased 2.7 percentage points to 38.2 in the first quarter, compared with a level of 100 that represents a balanced marketplace.  This is the second gain following nearly three years of declines; the last time the market was in equilibrium was in the third quarter of 2007.

Development activity remains at a standstill with nine out of 10 respondents saying that it is virtually nonexistent in their markets.

Looking at the overall market, commercial vacancy rates appear to be approaching a plateau, according to NAR's latest COMMERCIAL REAL ESTATE OUTLOOK. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets.  Historic data were provided by CBRE Econometric Advisors.

Office Market

With an elevated level of sublease space available, vacancy rates in the office sector are projected to increase from 16.9 percent in the first quarter of this year to 17.6 percent in the first quarter of 2011, but should ease later next year.

Annual office rent is likely to fall 2.3 percent this year and decline another 2.1 percent in 2011.  In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast to be a negative 24.6 million square feet this year and then a positive 25.5 million in 2011.

Industrial Market

Leasing activity in the industrial sector is below historical levels with higher vacancies, more tenant concessions from landlords and a steeper decline in rental rates.  In addition, obsolete structures remain on the market.  Industrial vacancy rates are expected to rise from 14.3 percent in the first quarter of 2010 to 14.8 percent in the first quarter of 2011, then decline modestly as the year progresses.

Annual industrial rent will probably drop 6.3 percent this year, and decline another 1.5 percent in 2011.  Net absorption of industrial space in 58 markets tracked is seen at a negative 90.0 million square feet this year and a positive 135.6 million in 2011.

Retail Market

Retail vacancy rates should rise modestly from 12.6 percent in the first quarter of this year to 12.8 percent in the first quarter of 2011, and should hold at that level for most of next year.

Average retail rent is projected to decline 1.5 percent in 2010, then edge up by 0.4 percent next year.  Net absorption of retail space in 53 tracked markets is likely to be a negative 3.7 million square feet this year and then a positive 8.9 million in 2011.

Multifamily Market

The apartment rental market - multifamily housing - is expected to benefit from an improving economy and job market.  Multifamily vacancy rates are forecast to decline from 7.3 percent in the first quarter of this year to 6.3 percent in the first quarter of 2011.

With recent additions to supply, average rent is likely to slip 1.5 percent this year, and then rise 1.2 percent in 2011.  Multifamily net absorption should be 145,700 units in 59 tracked metro areas this year, and another 214,500 in 2011.

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