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March 19, 2013

NAR Sees Growth in Commercial Sector

By Keith Loria, Contributing Editor 

NAR’s George Ratiu

The National Association of Realtors has released its quarterly commercial real estate forecast and showed that most major commercial real estate sectors are continuing to slowly improve.

NAR’s latest Commercial Real Estate Outlook offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multi-family markets. According to the report, economic improvement and job creation is driving absorption of space.

“In terms of commercial real estate, 2012 turned out to be a good year, after a period of the last five years when we had the recession marked by negative absorption up through the latter end of 2010,” George Ratiu, research economist with NAR, told Commercial Property Executive. “There was improvement in 2011, but with a solid supply, 2012 is moving in the right direction.” 

The report showed that overall, commercial real estate leasing activity continued to grow in most markets during the closing months of 2012, which, in turn, is modestly lowering vacancy rates in all of the commercial sectors for 2013. Vacancy rates in the office sector are forecast to fall from a projected 16.0 percent in the first quarter to 15.6 percent in the first quarter of 2014.

According to Ratiu, national vacancy rates over the coming year are expected to decline 0.4 percentage points in the office market, 0.4 point in industrial, 0.3 point for retail and 0.1 point in multi-family, with that sector experiencing the tightest availability.

“The office, retail and multi-family are very much tied to employment and the state of the economy. In that front, 2012, though moderate, was a positive year as more than two million jobs were added or created,” Ratiu said. “Not exactly what economists would describe as a post-recession environment, but it’s positive.”

The markets with the lowest office vacancy rates in the first quarter are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 9.6 percent; and Little Rock, Ark., 12.1 percent.

The report expects office rents to increase 2.6 percent in 2013 and 2.8 percent next year, following a 2.0 percent gain in 2012.  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 expected to total 34.0 million square feet this year and 42.3 million in 2014.

Despite what some are saying, Ratiu doesn’t believe that sequestration will have much affect on commercial real estate. 

“Overall we are looking at an 85 million sequestration impact, which in the grand scheme of a 13.6 trillion economy, is only 0.6 percent of the economy,” he said. “So, despite a lot of political angling, I don’t think the sequestration will have any huge impact on the economy or commercial real estate.”

Retail vacancy rates are forecast to slide from 10.7 percent in the first quarter of the year to 10.4 percent in the first quarter of 2014. Presently, markets with the lowest retail vacancy rates include San Francisco, 3.5 percent; Fairfield County, Conn., at 4.2 percent; and Orange County, Calif., 5.2 percent.

The report further shows that average retail rents will probably rise 1.5 percent in 2013 and 2.1 percent next year, following a 0.8 percent gain in 2012. Net absorption of retail space is seen at 11.9 million square feet in 2013 and 16.4 million next year. 

“I think 2013 will be a good year to build on the foundation of the last two years,” Ratiu said. “In terms of fundamentals, I expect demand for space to continue to increase incrementally.”

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