Commercial Real Estate Could Be Recovering

Word from the National Association of Realtors is that commercial real estate is slowly getting well. Very slowly.
The NAR’s chief economist noted that apartment rents “could” increase by 1%-2% in 2011, after staying flat in 2010. That’s slow.

The best performance is expected to come from multi-family housing. Overall, “[t]he outlook for the office and industrial markets has moderated with modestly declining vacancy rates expected as 2011 progresses, while the retail sector should hold fairly steady. Still, high vacancy rates imply falling rents,” the group says.
Retail vacancy rates are expected to drop a very modest amount, from 13.1% in the current quarter to 13% in the fourth quarter of 2011. Average rents are also expected to drop 0.3% in 2011, far better than the 3.4% drop in 2010. Still, that’s not exactly high rolling.
Vacancy rates in office buildings are forecast to fall from 16.7% in the current quarter to 16.4% in the fourth quarter of next year. Most of the change will occur in the last half of the year. Office rents are expected to be 1.8% lower this year and then to fall another 1.6% in 2011.
Industrial vacancy rates are forecast to decline from 13.9% this year to 13.2% next year. Rents are expected to fall by 4% this year and another 3.4% next year.
If rents for office and industrial space is going to decline for yet another year, it’s hard to see how that will do much to improve the outlook for commercial real estate. Sure occupancy rates will be higher, but at lower rents. That’s not a formula for growth.
The US Federal Reserve growth forecast for the US economy posts a 3.0%-3.6% annualized growth rate in GDP by the fourth quarter of next year. That’s better than this year, but still no exactly robust. And that’s the strongest forecast. Many other economists and groups have pegged US GDP growth a less than 3% next year.
The good news for commercial real estate owners is that business spending is expected to pick up by more than 10% next year, including an uptick of 1.8% in spending on structures. That could presage a boost in employment, which more than anything else, would give the US economy the kick-start it needs.
Paul Ausick