WASHINGTON, September 17, 2008
Activity is slowing in commercial real estate sectors in response to tightening credit and slow economic growth, according to the latest COMMERCIAL REAL ESTATE OUTLOOK* of the National Association of Realtors®.
Lawrence Yun, NAR chief economist, said problems on Wall Street are affecting commercial real estate. “Although capital remains available for residential loans, the credit crunch is pronounced in commercial lending,” he said. “Combined with a slowing economy, the lack of credit is curtailing activity in the commercial real estate sectors. As a result, there’s been a slowdown in the net absorption of space, which is leading to higher vacancies and more modest rent growth.”
Patricia Nooney of St. Louis, chair of the Realtors® Commercial Alliance Committee, said market conditions are complex. “We’re in an unusual situation where transactions are being curtailed not for lack of demand, but for serious challenges in obtaining financing,” she said. “In this environment it’s even more important for anyone needing commercial space to work with a Realtor® who knows the local commercial real estate market and available resources.”
The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by Torto Wheaton Research.
This year’s erosion in the job market has slowed demand for office space. “Job cuts since the beginning of the year will bring more vacant office space to the market,” Yun said. “Office rent growth will slow greatly as a result.”
Office vacancy rates are expected to increase to 14.4 percent in the second quarter of 2009 from 12.9 percent in the second quarter of this year. Annual rent growth in the office sector should be 3.2 percent this year before contracting 0.4 percent in 2009; it rose 8.0 percent last year.
Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is projected at 14.7 million square feet this year and 10.9 million in 2009, down sharply from 57.3 million square feet last year.
The economic slowdown has curtailed warehouse demand, although the drop in the dollar continues to favor American goods. “The industrial sector will hold up relatively better on the strength of exports,” Yun said.
Vacancy rates in the industrial sector are likely to rise to 10.8 percent in the second quarter of 2009, up from 9.9 percent in the second quarter of this year. Annual rent growth is forecast at 1.1 percent this year and 1.0 percent in 2009; it rose 3.6 percent last year.
Net absorption of industrial space in 58 markets tracked will probably total a negative 16.7 million square feet this year and then rise to 35.3 million in 2009, compared with 120.3 million last year. A pattern of building to suit specific needs continues, with many obsolete structures remaining on the market.
Spiking food and energy costs have squeezed retail spending. “Sluggish consumer spending over the next 12 to 18 months will force retail rent growth to turn negative in 2009,” Yun said.
Vacancy rates in the retail sector are expected to be 10.4 percent in the second quarter of 2009, up from 9.7 percent in the second quarter of this year. Average retail rent is estimated to grow 1.2 percent in 2008 and then decline by 0.9 percent in 2009, compared with a 3.2 percent increase last year.
Net absorption of retail space in 53 tracked markets should shrink by 2.6 million square feet this year before rising 2.8 million in 2009, down from 11.1 million absorbed last year.
The apartment rental market – multifamily housing – remains favorable as many potential first-time home buyers stay on the sidelines. “Apartment rents are expected to rise at respectable pace, partly due to healthy demand for rental units,” Yun said.
Multifamily vacancy rates are projected to rise to 5.9 percent in the second quarter of 2009 from 5.4 percent in the second quarter of this year. Average rent will probably rise 3.9 percent in 2008 and 4.0 percent next year, up from a 3.1 percent increase in 2007.
Multifamily net absorption is forecast at 61,400 units in 59 tracked metro areas this year and 188,200 in 2009 compared with 234,400 last year.
The COMMERCIAL REAL ESTATE OUTLOOK is published by the NAR Research Division for the Realtors® Commercial Alliance. The RCA, formed by NAR in 1999, serves the needs of the commercial market and the commercial constituency within NAR, including commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and NAR affiliate organizations.
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