Commercial Real Estate Healing Slowly

Commercial real estate will still be moving at a snail's pace until the end of the year, as unemployment and tight lending practices continue to dominate the national market.

Commercial real estate will continue moving in an upward trajectory for the next few months, but at a sluggish pace, mainly due to meek job creation and tight loan underwriting, according to the National Association of Realtors’ quarterly commercial real estate forecast.

“With the general slowdown in national economic conditions, and especially weak employment trends, commercial real estate is following the broader trends,” George Ratiu, NAR’s manager of quantitative and commercial research, told Commercial Property Executive. “Since demand for office and retail spaces is directly correlated to employment data, lack of new jobs translates into less absorption of space, accompanied by softer rent growth and lingering vacancies.”

According to the NAR forecast, the commercial sectors are showing mixed results. Vacancy is shrinking marginally and rents are rising modestly in all sectors, but significant changes in the outlook are unlikely before the end of the year. Demand for office space is stalling because of slowing job creation, which fell by half from the first quarter to the second quarter. Net absorption will slow in the office sector from 7.6 million square feet in the third quarter to 6.3 million square feet in the fourth quarter, before picking up momentum again in early 2013. By the third quarter next year, absorption, Ratiu predicts, will reach 16.3 million square feet.

Vacancy in office space will decline from 16 percent in fourth quarter to 15.6 percent by the end of 2013.

Industrial space demand, on the other hand, is on the upswing, due to robust trade with countries like India, China, Brazil, Mexico and  last but not least, Canada. “International trade has been a bright spot. The pace of imports has been increasing,” said Ratiu.

NAR is predicting 15.6 million square feet of net absorption in industrial space for the third quarter. Absorption will continue to decline through the first quarter of 2013, before jumping to 18.8 million square feet in the second quarter of next year.

Industrial vacancy will decline 30 basis points by the end of next year, to 10.4 percent.

Lower demand is also moderating growth of rent prices, with the notable exception of the multi-family market. Demand for apartments is causing rents to rise at faster rates.   “Household formation—which has averaged 1.0-1.2 million new households per year—declined to under 400,000 in 2011,” said Ratiu. “But, with still-positive employment and continued growth in underlying demographics, the expectation is for household formation to return to long-term trends.”

Multi-family vacancy will remain the tightest sector, declining modestly from 4.3 percent this quarter to 4.1 percent by the fourth quarter of 2013.

Retail vacancy will decrease slightly from 10.8 percent at the end of this year to 10.7 percent by the fourth quarter of 2013.

Financing continues to be a great concern, as borrowing—especially for smaller properties—remains as difficult as it was several years ago during the subprime mortgage crisis.

“NAR’s outlook for the remainder of 2012 is for continued growth, at a moderate pace. We foresee absorption to rise, accompanied by slight declines in vacancies,” Ratiu concluded.