Multifamily Rentals Leading Commercial Market to Slow Recovery

While the commercial real estate markets are reflecting the overall softness of the economy, there are some signs of improvement according to data released today by the Society of Industrial and Office Realtors® (SIOR.)  SIOR, a division of the National Association of Realtors®, reports that its Commercial Real Estate Index, which fell 2.6 points in the second quarter of 2011 after six quarters of growth has recovered slightly (+0.6 points) in the third.

The Index, derived from a survey of 231 local market experts and based on 10 market variables (unspecified by SOIR), is now at 5.5 after rising as high as 57.5 in the first quarter of the year.  An index level of 100 represents a balanced marketplace.  That level was last reached in the third quarter of 2007.  Ninety-two percent of respondents reported that the economy is having a negative impact on their local market.

SOIR expects things to continue its slow improvement over the next four quarters, with vacancy rates declining modestly and rents gradually rising

Lawrence Yun, NAR chief economist, said there is little change in most of the commercial market sectors.  "Vacancy rates are flat, leasing is soft and concessions continue to make it a tenant's market," he said.  "However, with modest economic growth and job creation, the fundamentals for commercial real estate should gradually improve in the coming year.

The strongest forecast is for multifamily housing where the vacancy rate is already the lowest of any sector.  The fourth  quarter 2011 rate is projected at 5.0 percent and is expected to drop to 4.3 percent by Q4 2012.  Multifamily vacancy rates below 5 percent are generally considered a landlord's market with demand justifying higher rents.

Yun sees the tightening market leading to rates trending modestly higher in 2012. Average apartment rent is projected to rise 2.5 percent this year and another 3.5 percent in 2012, however Yun is even more optimistic; "If new multifamily construction doesn't ramp up," he said, "rent growth could potentially approach 7 percent over the next two years"

Multifamily net absorption is likely to be 238,400 units this year and 126,600 in 2012.  Areas with the lowest multifamily vacancy rates currently are Minneapolis, 2.4 percent; New York City, 2.7 percent; and Portland, Ore., at 2.8 percent.

Construction activity remains low; 96 percent of respondents indicate that it is lower than normal and 88 percent saying it is a buyers' market in terms of development acquisitions.  Prices are below construction costs in 83 percent of markets.

Vacancy rates in the office sector are expected to fall from 16.7 percent in the current quarter to 16.1 percent in the fourth quarter of 2012 and rents will follow a 1.4 percent increase in 2011 with another 1.7 percent rise.  Net absorption of office space in the U.S. including leasing of both new and existing space is projected to be 20.2 million square feet in 2011 and 31.7 million in 2012. 

Industrial vacancy rates are projected to decline from 12.3 percent in the fourth quarter of this year to 11.7 percent in the fourth quarter of 2012.  Rents will finish out this year down 0.5 point but will increase 1.8 percent next year.  Net absorption of industrial space nationally should be 62.0 million square feet this year and 41.2 million in 2012.

Retail vacancy rates are likely to decline from 12.6 percent in the current quarter to 11.8 percent in the fourth quarter of 2012. Average retail rent is expected to decline 0.2 percent this year, and then rise 0.7 percent in 2012. Retail space will be absorbed at a net rate of 1.2 million square feet this year and 13.5 million in 2012.