Commercial Real Estate Improves, Multifamily Strong

Shaking off a prolonged impact from the recession, fundamentals are gradually improving in all of the major commercial real estate sectors, according to the National Association of REALTORS® quarterly commercial real estate forecast. The apartment rental sector has fully recovered and is growing.

The findings also are confirmed in NAR’s recent quarterly Commercial Real Estate Market Survey, which collects data from members about market activity.

Lawrence Yun, NAR chief economist, said new jobs are the key. “Ongoing job creation, which is at a higher level this year, is fueling an underlying demand for commercial real estate space, assisted by a steady increase in consumer spending,” he said. “The pattern shows gradually declining commercial vacancy rates, with consequential but generally modest rent growth.”

Yun expects the economy to add 2 to 2.5 million jobs both this year and in 2013, on the heels of 1.7 million new jobs in 2011, assuming a new federal budget is passed before the end of the year. “Although we need even stronger job growth, by far the greatest impact of job creation is in multifamily housing, where newly formed households striking out on their own have increased demand for apartment rentals – this is the sector with the lowest vacancy rates and strongest rent growth, which is attracting many investors.”

Rising apartment rents also are having a positive impact on home sales because many long-time renters now view homeownership as a better long-term option, Yun noted.

A large problem remains for purchases of commercial property priced under $2.5 million. “Our recent commercial lending survey shows that there is very little capital available for small business, which is significantly impacting commercial real estate transactions, although funding is less restrictive for bigger properties.”

NAR’s latest Commercial Real Estate Outlook offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., a source of commercial real estate performance information.
Office Markets

Vacancy rates in the office sector are projected to fall from 16.3 percent in the second quarter of this year to 16.0 percent in the second quarter of 2013.

The markets with the lowest office vacancy rates:

Washington, D.C.: 9.3% vacancy rate
New York City: 10%
New Orleans: 12.6%

Office rents should increase 2.0 percent this year and 2.5 percent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 24.7 million square feet in 2012 and 48.0 million next year.
Industrial Markets

Industrial vacancy rates are likely to decline from 11.0 percent in the current quarter to 10.7 percent in the second quarter of 2013.

The areas with the lowest industrial vacancy rates:

Orange County, Calif.: 4.7% vacancy rate
Los Angeles: 5%
Miami: 7.2%

Annual industrial rent is expected to rise 1.6 percent in 2012 and 2.4 percent next year. Net absorption of industrial space nationally is seen at 44.1 million square feet this year and 62.4 million in 2013.
Retail Markets

Retail vacancy rates are forecast to decline from 11.3 percent in the second quarter to 10.7 percent in the second quarter of 2013.

Presently, markets with the lowest retail vacancy rates:

San Francisco: 3.7% vacancy rate
Fairfield County, Conn.: 4%
Long Island, N.Y.: 5%

Average retail rent should rise 0.8 percent this year and 1.3 percent in 2013. Net absorption of retail space is projected at 8.0 million square feet this year and 21.9 million in 2013.
Multifamily Markets

The apartment rental market – multifamily housing – is likely to see vacancy rates drop from 4.5 percent in the second quarter to 4.3 percent in the second quarter of 2013; apartment vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates:

New York City: 2.1%
Portland, Ore.: 2.3%
Minneapolis: 2.4%

After rising 2.2 percent last year, average apartment rent is expected to increase 4.0 percent in 2012 and another 4.1 percent next year. “Such a rent increase will raise the core consumer inflation rate. The Federal Reserve, in turn, may be forced to raise interest rates, possibly as early as late 2013.”

Multifamily net absorption is forecast at 215,900 units this year and 230,300 in 2013.

The Commercial Real Estate Outlookis published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR. The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, REALTORS® Land Institute, Society of Industrial and Office REALTORS®, and Counselors of Real Estate. Approximately 78,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 232,000 members offer commercial real estate services as a secondary business.

Source: NAR

Bigger is No Longer Better in Housing, Study Says
Aspiring home owners are thinking small with their purchase, a trend that is expected to grow in the coming years, according to a new report — “The Shifting Nature of U.S. Housing Demand” — by the Demand Institute, a division of the U.S. Conference Board.

“Many [buyers] will scale back their housing aspirations,” according to the report. The report projects that the average size of a new home will go from 2,500 square feet during the housing boom to 2,150 square feet by 2015. That is about the same size of homes in the mid-1990s before the McMansion trend took hold.

The report suggests that other businesses may see a benefit from this expected decrease in square footage in homes, too.

For example, the report suggests that home owners likely will turn to commercial storage spaces more instead of having big basements or attics to store their treasures. Also, more home owners may opt for a gym membership over devoting square footage in their home to a workout room. Also, as kitchens get smaller and have fewer cupboards, home owners may have to make more frequent trips to the grocery store, which could be a perk for the retail industry.

Source: “Housing’s Future: Renting and Downsizing,” The Wall Street Journal (May 15, 2012)

Top 15 Hot-Spots for Recent College Grads
College grads say that relocating for more employment opportunities is their main motivation for moving this year, according to a recent Apartments.com survey.

So where are the best places for them to relocate to? Apartments.com and CareerBuilder for the fifth year in a row have compiled a list ranking the top 15 best cities for recent college graduates, identifying the places that offer some of the best opportunities for employment and quality of life for young professionals.

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Commercial Real Estate Vacancy Rates Improve

According to the National Association of REALTORS®’ quarterly commercial real estate forecast, all of the major commercial real estate sectors are seeing improved fundamentals, but multifamily housing is becoming a landlord’s market, commanding bigger rent increases. These trends also are confirmed in NAR’s recent quarterly Commercial Real Estate Market Survey.

Lawrence Yun, NAR chief economist, said vacancy rates are improving in all of the major commercial real estate sectors. “Sustained job creation is benefiting commercial real estate sectors by increasing demand for space,” he said. “Vacancy rates are steadily falling. Leasing is on the rise and rents are showing signs of strengthening, especially in the apartment market where rents are rising the fastest.”

NAR forecasts commercial vacancy rates over the next year to decline 0.4 percentage point in the office sector, 0.8 point in industrial real estate, 0.9 point in the retail sector and 0.2 percentage point in the multifamily rental market.

“Household formation appears to be rising from pent-up demand,” Yun said. “The tight apartment market should encourage more apartment construction. Otherwise, rent increases could further accelerate in the near-to-intermediate term.”

The Society of Industrial and Office REALTORS® shows a notable gain in its SIOR Commercial Real Estate Index, an attitudinal survey of 297 local market experts.

The SIOR index, measuring the impact of 10 variables, jumped 8.3 percentage points to 63.8 in the fourth quarter, following a gain of 0.6 percentage point in the third quarter. The index remains well below the level of 100 that represents a balanced marketplace, which was last seen in the third quarter of 2007.

Most market indicators posted advances in the fourth quarter, but 71 percent of respondents said leasing activity is below historic levels in their market — an improvement from 83 percent in the third quarter. Only 29 percent report there is ample sublease space available.

Office and industrial space remains a tenant’s market — 87 percent of participants feel that tenants are getting a range of benefits ranging from moderate concessions to deep rent discounts.

Construction activity is still low, with 95 percent of experts reporting it is below normal, and 83 percent said it is a buyers’ market for development acquisitions; prices are below construction costs in 78 percent of markets.

Participants are broadly expecting stronger conditions for the current quarter, with two out of three expecting market improvement.

NAR’s latest Commercial Real Estate Outlookoffers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS Inc., a source of commercial real estate performance information.
Office Markets

Vacancy rates in the office sector are projected to fall from 16.4 percent in the current quarter to 16.0 percent in the first quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.5 percent; New York City, at 10.0 percent; and New Orleans, 12.4 percent.

After rising 1.6 percent in 2011, office rents should increase another 1.9 percent this year and 2.4 percent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is forecast at 20.1 million square feet in 2012 and 28.1 million next year.
Industrial Markets

Industrial vacancy rates are likely to decline from 11.7 percent in the first quarter of this year to 10.9 percent in the first quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.8 percent; Los Angeles, 4.9 percent; and Miami at 7.6 percent.

Annual industrial rent is expected to rise 1.8 percent in 2012 and 2.3 percent next year. Net absorption of industrial space nationally is seen at 40.6 million square feet this year and 57.7 million in 2013.
Retail Markets

Retail vacancy rates are forecast to decline from 11.9 percent in the current quarter to 11.0 percent in the first quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.6 percent; Fairfield County, Conn., at 5.1 percent; and Long Island, N.Y., at 5.4 percent.

Average retail rent should rise 0.7 percent this year and 1.2 percent in 2013. Net absorption of retail space is projected at 9.9 million square feet this year and 23.9 million in 2013.
Multifamily Markets

The apartment rental market – multifamily housing – is likely to see vacancy rates drop from 4.7 percent in the first quarter to 4.5 percent in the first quarter of 2013; multifamily vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New York City, 1.8 percent; Minneapolis and Portland, Ore., each at 2.5 percent; and San Jose, Calif., at 2.7 percent.

After rising 2.2 percent last year, average apartment rent is expected to increase 3.8 percent in 2012 and another 4.0 percent next.

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Commercial Real Estate Prices Dip

Moody’s Investors Service is reporting that U.S. commercial real estate prices declined by 3.7 percent during the month of April, as distressed prices masked the price recovery seen in larger, higher-quality assets.

The commercial property sector continues to struggle with slumping demand, and April marks the fifth straight decline in the Moodys/Real Estate Analytics LLC commercial property price index. On the bright side, the price recovery that began a year ago among “trophy properties” in the biggest U.S. markets continued unabated.

Tad Philipp, Moody’s director of CRE research, states, “In April, we continued to see a case of where the strong are getting stronger and the weak are getting weaker. Major asset/major market prices have recovered more than half of their post-peak losses, while prices for distressed transactions have continued to bounce around the bottom.” Distressed property sales have now made up at least one-fifth of the repeat-sales transaction volume for 17 consecutive months.

Source: “Moody’s: US Commercial Real Estate Prices Fall 3.7 Percent in April,” The Wall Street Journal, Melodie Warner (June 23, 2011)

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Commercial Real Estate Prices Show Gains

Green Street Advisors, independent research firm, reported that its commercial property price index rose 2 percent in November and was up 30 percent from the industry low in 2009.

“Half of the decline in values that occurred from 2007 to 2009 has been eradicated. Nevertheless, values remain roughly 20 percent shy of their peak,” said Mike Kirby, director of research for Green Street.

Unlike many indexes, which are based on closed transactions, Green Street records transactions as they go under contract.

Source: Green Street Advisors (12/02/2010)

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Commercial Real Estate Yields Spur Investors

Yields on U.S. commercial real estate are nearing a record high compared to Treasury bonds. Many investors take that as a signal to buy property.

Capitalization rates, a measure of real estate yields, averaged 7.22 percent in the second quarter, as calculated by the National Council of Real Estate Investment Fiduciaries. That was 4.29 percentage points higher than the yield on 10-year government bonds as of June 30 and 4.75 percentage points higher than Treasury yields as of Aug. 31.

These returns are near the record 5.39 percentage points in the first quarter of 2009, when the U.S. was dealing with the worst economic downturn since the Great Depression. The spread shrank to less than 80 basis points when commercial real estate prices peaked in 2007.

“The data indicate that real estate is poised for a rebound,” says Gerardo Lietz, who advises pension funds on property investments.

Source: Bloomberg, Hui-yong Yu (09/01/2010)

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Commercial Real Estate Said to Turn Corner

U.S. commercial real estate prices rose 3.6 percent in May, according to Moody’s/REAL Commercial Property Price Indices CPPI. This is the second consecutive month of increases – prices were up 1.7 percent in April.

“The positive news of increasing prices over the past two months is tempered by low transaction volumes, forecasts for slowing macroeconomic growth and the rising risk of a double dip recession,” said Moody’s managing director Nick Levidy in a statement.

Prudential Financial executives, speaking at a market outlook discussion, said they were “reluctant optimists” about commercial real estate. “As it cranks up, it’s going to start going pretty quickly in the next three, four years,” he predicted.

Sources: The Wall Street Journal, A.D. Pruitt (07/19/2010) and CNBC.com, Jeff Cox (07/21/2010)

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Long Recovery Ahead for Commercial

Noted analyst Kenneth Laub told Bloomberg that the current downturn will overshadow recent commercial real estate downturns.

“It won’t be a typical part of a cycle where we’re down for two or three years and things recover,” says Laub, whose New York firm, Kenneth D. Laub & Co., has managed more than $40 billion worth of transactions since 1969. “It will be longer than we’ve gone through before.”

The difference today, Laub says, is the volume of debt financing that pushed up prices dramatically and left property owners struggling to make mortgage payments.

“It’s not a supply-demand thing; it’s an overleveraged condition,” Laub says.

He predicts years of restructuring. “What you’re going to see is a tremendously long workout period unprecedented in commercial real estate in this country,” Laub says. “That’s where we’re going, and it’s just beginning.”

Source: Bloomberg, Beth Williams and Stuart Bern (10/13/2010)

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Decline in Commercial Real Estate Sectors Appears to be Slowing.

Commercial real estate activity has suffered from a severe credit crunch for commercial sectors, sustained job losses and weak consumer spending, although the decline appears to be slowing.  A forward-looking indicator shows commercial real estate will remain weak into 2010, but recent actions by the Federal Reserve should improve some flow of capital into commercial lending, according to the National Association of Realtors®.

The Commercial Leading Indicator for Brokerage Activity1 declined 1.3 percent to an index of 101.5 in the second quarter from a downwardly revised reading of 102.8 in the first quarter, and is 13.7 percent below the 117.6 recorded in the second quarter of 2008.  The index is at the lowest level since the first quarter of 1994; NAR’s track of the commercial leading indicator dates back to 1990. Full Story..

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More Losses Predicted for Commercial Market

Ranked among the biggest U.S. commercial real estate lenders by Moody’s Investors Service, Capmark Financial Group Inc. recorded a $1.6 billion quarterly loss and hinted at a possible Chapter 11 bankruptcy filing.

The Pennsylvania-based firm’s possible failure may signal a new wave of commercial property losses for banks.

Capmark has seen tough times, as the default rate on commercial mortgages held by U.S. banks has more than doubled to the highest level in 15 years.

Sam Chandan, chief economist at Real Estate Econometrics LLC, warns: “We haven’t really experienced the full extent of the distress. When you look at community banks and some smaller regional banks, they tend to have a far greater concentration in terms of their exposure to commercial real estate.”

Source: Linda Shen, Bloomberg (09/04/09)

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Commercial real estate gets worse

The commercial real estate downturn is deepening, threatening to slow the economic recovery.

To try to contain the damage, the Federal Reserve said Monday that it will extend into 2010 a program to help investors buy commercial property loans. But some say that will have limited impact.

“We seem to be nearing the end of the recession but the situation in the commercial real estate market is getting worse,” says Patrick Newport, an analyst at IHS Global Insight.

About $83 billion of office, retail, industrial and apartment properties have fallen into default, foreclosure or bankruptcy this year, says research firm Real Capital Analytics. The default rate for commercial mortgages jumped from 1.62% to 2.25% in the first quarter and should hit 4.1% by the end of the year, says Sam Chandan, president of Real Estate Econometrics. The carnage will likely cut half a percentage point off economic growth this year and in 2010, Newport says.

Fueled by easy credit, developers built too many shopping malls and office buildings from 2004 to 2007. As the economy soured, vacancy rates rose. Property values are down about 40% from their 2007 peak, Deutsch Bank says, and loans for commercial properties have come to a virtual standstill.

By Paul Davidson, USA TODAY
Full story…

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