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Home arrow Real Estate News arrow General News arrow Improvements in the Real Estate Sectors Persist
Improvements in the Real Estate Sectors Persist Print E-mail
Wednesday, 13 September 2006

Tightening vacancy rates and rising rents are pouring funds into commercial sectors.  Commercial real estate markets expect this.  

David Lereah, NAR's chief economist, said most commercial market fundamentals are solid. "Commercial real estate markets move in response to changes in fundamental demand, which remains solid as a result of sustained job creation and economic growth," he said. "Except for some weakness in the retail sector, the commercial market is benefiting from lower vacancies and higher rents."

These institutions spent over $31.0 billion in all of the commercial sectors so far this year, which is seen to be a record for institutional investment in commercial grade properties.  Institutional investors and private equity funds accounted for half of all office buildings purchased during the first seven months of 2006, and also purchased one-third of industrial real estate.

The NAR forecast for five major commercial sectors includes analysis of quarterly data for various tracked metro areas. The sectors include the office, industrial, retail, multifamily and hospitality markets. Metro data were provided by Torto Wheaton Research and Real Capital Analytics.

With a slowdown in speculative construction, office market vacancy rates are expected to drop to an average of 13.0 percent in the fourth quarter from 13.6 percent during the same quarter of last year, and will be the lowest since 2001. Office rents are likely to rise 5.5 percent for all of 2006.

Net absorption of office space in 56 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is projected at 74.5 million square feet this year, compared with 90.3 million in 2005.

Vacancy rates in the industrial sector should decline to an average of 9.7 percent in the fourth quarter from 9.9 percent a year earlier, and will be at the lowest level in five years; rents are forecast to rise 1.5 percent in 2006. Although the greatest demand remains in port markets, new construction is popular in secondary markets and other areas with lower land values and fewer site remediation concerns.

Industrial transaction volume so far in 2006 totaled $23.6 billion, with a record possible this year. The highest industrial market rent per square foot is in San Diego; Orange Country, Calif.; and Los Angeles. The highest prices being paid for industrial properties, outside of Manhattan, are in Northern Virginia; San Jose, Calif.; and Las Vegas.

Retail is the only commercial sector currently experiencing a decline in fundamentals. Higher interest rates and fluctuating oil prices are impacting consumer confidence, with some fallout in the retail market. Vacancy rates are likely to rise to 8.1 percent in the fourth quarter from 7.2 percent in the fourth quarter of 2005. Average retail rent will probably decline 1.4 percent this year before gaining traction in 2007. Mergers continue to impact regional malls and main streets in many areas.

The highest-priced retail real estate is in Manhattan and Washington, while the highest gross rents are in Riverside, Calif.; San Jose; and Orange County, Calif. During the first seven months of 2006, a total of $22.3 billion was invested in retail real estate.

The apartment rental market -- multifamily housing -- is benefiting from weaker home sales as potential home buyers remain in rental housing. Vacancy rates in the fourth quarter are expected to average 5.2 percent, down from 6.2 percent during the fourth quarter of 2005. Average rent is projected to increase 4.8 percent in 2006, compared with 2.9 percent last year.

The National Association of Realtors(R), "The Voice for Real Estate," is America's largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

Edwina Baniqued


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