National Association of Realtors Forecasts More Stabilization in CRE

The organization's latest report anticipates increasing improvement across the board for the national commercial real estate market.

February 25, 2011
By Barbra Murray, Contributing Editor

George Ratiu

The National Association of Realtors has released its latest Commercial Real Estate Outlook report, and the organization anticipates increasing improvement across the board for the national commercial real estate market.

There was overbuilding in just about every sector of commercial real estate in the few years leading up to the market’s peak in 2007, but construction activity has long since tapered off, which is making all the difference. NAR chief economist Lawrence Yun noted that very limited commercial construction over the past few years has fixed the supply of available space, meaning vacancy rates could tumble quickly.

Among the office, industrial, retail and multi-family sectors, the office sector is presently suffering the most. While New York City and Honolulu are helping ease the pain with estimated first quarter 2011 vacancy rates of 8 percent and 9 percent, respectively, the national average vacancy rate is 16.5 percent. A bit of year-over-year progress is in store; the rather high figure is on track to decline to 16 percent in the first quarter of 2012.

The industrial sector is expected to experience a more significant amount of improvement, with the 14.2 percent vacancy rate on track to drop to 12.9 percent in the first quarter of next year. Salt Lake City and Los Angeles, the top port in the U.S. in terms of traffic, are keeping numbers down with vacancy rates of 7.5 percent. “In the last half of 2010, a lot of businesses depleted their inventory because they didn’t build it up in 2008 and 2009 due to the recession,” George Ratiu, an economist with NAR, told CPE. “Now they are starting to rebuild their inventories.”

The retail sector, with a current vacancy rate of 13 percent, will improve, but by the smallest margin among the four sectors. NAR predicts that the retail vacancy rate will decline just a tad to 12.9 percent one year from now. In the meantime, San Francisco, Miami, Honolulu, and Long Island, N.Y., are the bright spots, recording average vacancies of approximately 7 to 8 percent.

“In large part, the main thrust is the issue of employment; office and retail are largely dependent on that,” Ratiu said. “If companies are not hiring, they don’t require more office space and with retail, if people are not earning money, they are not going to go out and spend. Increased employment; that is what will lift these sectors.”

It is the apartment sector, however, that outshines them all. As the economy improves, the apartment market improves. The sector’s current vacancy rate of a relatively low 5.8 percent will have dropped even lower to 4.9 percent come the first quarter of 2012. “With multi-family, there is a combination of issues,” he noted. “On one hand, we have the issue of employment. A number of young people are entering the labor force, so the formation of new households will increase in 2011. The number of college grads is not slowing down. They may be having problems finding jobs, but at the same time, these are the folks who are most likely to find employment because of their wage bracket. And on the other hand, we have the demographics of the housing market. With so many foreclosures still taking place, people have to live somewhere and one of their alternatives is renting.”

There is one common road to success for office, industrial, retail and multi-family, he said. “For all the sectors, employment remains the main factor.”