Commercial U.S. real estate easing in economic slowdown | July 18, 2008 | Danville Express | |

Danville Express

Real Estate - July 18, 2008

Commercial U.S. real estate easing in economic slowdown

Investment drops sharply in wake of credit crunch

by Jeb Bing

Commercial real estate vacancies are trending up modestly, while investment has dropped sharply in the wake of the credit crunch, according to preliminary information for the latest Commercia Real Estate Outlook of the National Association of Realtors.

NAR Chief Economist Lawrence Yun said economic weakness is impacting commercial real estate.

"Although the supply-demand fundamentals are broadly favorable in most commercial real estate markets, vacancy rates are rising modestly and rent gains are slowing," he said. "Slow economic growth is lowering demand for commercial space, mostly in the office and industrial sectors. Despite the slowdown, the commercial real estate market is in much better shape compared to conditions during the 2001 recession."

Patricia Nooney of St. Louis, chairwoman of the Realtors Commercial Alliance Committee, said credit has been a problem.

"Tight credit availability has significantly slowed the volume of commercial real estate transactions," she said. "Even so, institutional investors, along with foreign investors who are encouraged by the drop in the dollar, remain active in the current market. Because conditions are so varied across the country, we recommend investors or businesses looking for space consult with Realtors in their area who specialize in commercial real estate."

Investment in commercial real estate during the first four months of 2008 was $48.2 billion, down 69.5 percent from $157.8 billion during the same period in 2007 when the credit markets were functioning normally. Those totals do not include transactions valued at less than $5 million or investments in the hospitality sector.

With a growth in inventory, office vacancy rates are projected to increase to 13.7 percent in the fourth quarter of this year from 12.5 percent in the fourth quarter of 2007. As a result, annual rent growth in the office sector is expected to be 3.0 percent this year, following an 8.0 percent jump in 2007.

Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 31.3 million square feet this year for the country as a whole, about half of the 60.0 million absorbed in 2007.

"Part of the slowdown in office absorption results from new space coming online and the challenge of back-filling older class B and class C buildings," Yun said.

Office building transaction volume has dropped significantly. In the first four months of 2008, a total of only $18.5 billion in office buildings traded hands, compared with $95.0 billion during the same timeframe in 2007. The greatest decline was in suburban markets.

Warehouse demand has fallen because of the economic slowdown, although the demand for light manufacturing space has risen slightly. "The drop in the dollar is favoring American goods, stimulating some manufacturing with a solid pickup in exports," Yun said.

Even so, overall vacancy rates in the industrial sector are forecast to rise to 9.9 percent in the fourth quarter of this year, up from 9.4 percent in the same period of 2007. Annual rent growth should be 1.2 percent by the end of the year, down from 3.6 percent in the fourth quarter of 2007.

Net absorption of industrial space in 58 markets tracked is estimated at 68.8 million square feet this year, down from 158.3 million in 2007. Most of the new industrial completions have been built-to-suit, leaving many obsolete or nearly obsolete structures on the market.

Secondary markets have become most attractive to institutional investors and users. Industrial transaction volume during the first four months of 2008 was $8.5 billion, down from $11.9 billion in same period of 2007.

Retail spending has been hurt by high oil prices with consumers throttling back on their spending habits, even in the retailing hotbed of Southern California.

"Fortunately, the construction of retail space has slowed, which is helping preserve some balance in the market," Yun said.

Vacancy rates in the retail sector will probably edge up to 9.3 percent in the fourth quarter from 9.2 percent in the fourth quarter of 2007. Average retail rent is expected to rise 1.3 percent in 2008, compared with a 2.9 percent gain last year.

Net absorption of retail space in 53 tracked markets is projected to grow to 18.2 million square feet in 2008 from 12.9 million last year.

Retail transaction volume during the first four months of 2008 totaled $7.5 billion, significantly below the $27.7 billion in the same period last year. Markets like Cincinnati and Detroit have seen a 100 percent decline in investment activity so far this year. Only Sacramento, Calif., is showing a gain, up 47 percent.

Foreign buyers are focused on retail strip centers in Southern California, Chicago, the Northeast and the Southeast. Even so, strip center transaction volume is down 77 percent from a year ago.

The apartment rental market--multifamily housing--could see less demand during the second half of the year as some first-time home buyers jump off the fence and into the market.

Multifamily vacancy rates are likely to rise to 5.7 percent in the fourth quarter from 4.8 percent in the fourth quarter of 2007. Average rent is forecast to rise 4.0 percent in 2008, up from a 3.1 percent increase last year.

Multifamily net absorption is seen at 219,900 units in 59 tracked metro areas this year, up from 230,900 in 2007.

Transaction volume in the multifamily market so far this year is only $13.7 billion, compared with $23.2 billion in the first four months of 2007 in the U.s.

Even so, some markets have seen increasing sales including San Francisco; San Jose; Tampa; Portland, Ore.; and Raleigh, N.C.