US commercial real estate to improve slightly in 2011

WASHINGTON, DC: The commercial property market is beginning to even out and is expected to modestly improve next year on a recovery in fundamentals, said the National Association of Realtors (NAR).

"The basic fundamental of rising commercial leasing demand, resulting from a steadily improving economy, means overall vacancy rates have already peaked or will soon top out," said NAR chief economist Lawrence Yun.

"The 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," he added.

Yun said multi-family housing, one area that had performed relatively well in the past year, is expected to perform best next year.

He forecasts apartment rates to inch up by 1% to 2% in 2011 after declining and 2009 and staying flat in 2010 on more household formation that will drive demand for home ownership and rentals, underpinned by economic improvements.

He noted that rental increases could start to force up broader consumer prices as well because the housing shelter cost of primary rent and owner's rental equivalence formed the largest component in the Consumer Price Index at 32% of its total weights.

Softer rents despite improving vacancy levels
Vacancy rates are slowly improving but rents remain soft with higher levels of subleasing space in the market, according to the Society of Industrial and Office Realtors' SIOR Commercial Real Estate Index.

The index, which measures the impact of 10 variables, was up by 1.6% to 42.6% in the third quarter, its fourth straight quarterly improvement after almost three years of decline. A balanced marketplace is represented by 100 points on the index, which was achieved in the third quarter of 2007.

The index is now at a similar level to the early-2009 index, with 59% of respondents expecting improvements in the office and industrial sectors during this quarter. While commercial real estate development registered no growth with little investment activities, development levels are beginning to increase in many parts of the country.

The office sector, with a high level of sublease space in the market, is expected to record lower vacancy levels to 16.4% in the fourth quarter of 2011 from 16.7% this quarter, with very little change during the first half of next year.

The markets with the lowest vacancies are New York City and Honolulu (9%), while other markets recorded double-digit vacancies.

On a yearly basis, office rent is expected to fall by 1.8% this year before slipping another 1.6% to 2011.

Net absorption of office spaces, including the leasing of upcoming spaces as well as existing spaces, is forecast at a negative 3.7 million sq ft before turning around to a positive 16.4 million ft in 2011, based on 57 markets tracked.

Meanwhile, industrial markets are expected to record a decline in vacancies to 13.2% from 13.9% next year with the lowest industrial vacancies recorded in Los Angeles, Salt Lake City and Kansas City (8% to 10%).

Annual industrial rents are expected to decline 4% this year before falling by another 3.4% in 2011, with net absorption in 58 markets projected at a negative 25.1 million sq ft this year and a positive 134 million sq ft next year.

Retail vacancies, on the other hand, are expected to only marginally improve from 13.1% to 13%, with the lowest vacancies this quarter in San Francisco, Orange County (California) and Honolulu (7% to 8%).

Retail rents are expected to drop by 3.4% this year before stabilising next year to record a decline of 0.3%, and net absorption of space in 53 markets tracked is expected to hit a negative 500,000 sq ft this year before turning to a positive five million sq ft in 2011.

The apartment rental market (multi-family housing) is expected to benefit from additional household formation, with vacancies expected to fall to 5.8% next year from 6.4% this year.

Currently, areas with the lowest vacancies are San Jose (California), Miami, Boston and Portland (Oregon), hovering at 4%.

Rents are expected to grow by 0.2% this year and a further 1.4% in 2011, with net absorption rates at 85,200 units in 59 tracked metro areas this year followed by another 147,000 units next year.