Modest Rebound Projected For Commercial Real Estate, Says NAR

12/17/2002

From: Walter Molony, 202-383-1177; E-mail: wmolony@realtors.org Lucien Salvant, 202-383-1176; E-mail: lsalvant@realtors.org Both of the National Association of Realtors(r)

WASHINGTON, Dec. 17 -- Leasing activity is gaining momentum, setting the pace for what is likely to be a modest rebound in commercial real estate over the next two years, according to the National Association of Realtors(r) COMMERCIAL REAL ESTATE QUARTERLY.

Thanks to economic growth, employment rose in most of the 54 markets tracked in the third quarter, fostering demand for commercial space. The NAR analysis covers a wide range of statistics and market rankings for the major commercial sectors including the office, warehouse, retail and multifamily markets, as well as market sector forecasts. It is produced with data provided by Property & Portfolio Research.(a)

David Lereah, NAR's chief economist, said increases in spending by both consumers and the federal government contributed to a 4.0 percent annual rate of growth in the Gross Domestic Product during the third quarter. "The improvement in GDP and jobs in the third quarter resulted in a modest increase in leasing activity," he said. "Even so, construction of new space outpaced the rate of absorption, which dampened rents while pushing up vacancy rates."

Lereah said business will have to step to the plate for the economy to keep growing. "With low inventories and very low borrowing costs, we expect business capital spending to rise and create more jobs over the next two years, so we are cautiously optimistic for a rebound in the commercial sector."

NAR President Cathy Whatley said commercial real estate construction is slowing but expected to remain at healthy levels relative to demand. "That should restrain occupancy gains and owner's pricing power for all property types over the next two years," she said. "Business caution and uncertainty over the future have the potential to derail healthy job creation, but the recovery in demand for commercial space should help pave the way for more solid gains after 2004."

"Keep in mind that a recovery in commercial real estate typically lags a general economic recovery, so with the projection for healthy job creation we should see a stronger rebound in the commercial markets by the middle of the decade," Whatley said.

Office Market For the office sector, a stabilization in labor markets and growth in service-sector employment reversed a downward trend in leasing activity in the 54 metro markets tracked during the third quarter, with net absorption rising to 4.7 million square feet, marking the first positive quarter since the dot-com implosion in early 2001.

At the same time, approximately 26.6 million square feet of new office space came online in these markets, 10.0 percent lower than the third quarter of 2001. The vacancy rate rose to 16.4 percent in the third quarter from 13.1 percent a year ago, while office rents declined an average of 8.2 percent from the third quarter of 2001. Construction totaled 24.7 million square feet during the third quarter, nearly 40 percent below a year ago.

Based on rent growth, the healthiest office market during the third quarter of 2002 was the Inland Empire (Riverside, Calif.), up 2.8 percent from a year earlier; this was followed by a number of areas posting declines of less than 3.0 percent, including Long Island, N.Y.; Washington, D.C.; Sacramento; Philadelphia; Stamford, Conn.; and Los Angeles.

With 1.7 million new office jobs projected in the 54 markets tracked over the next two years, net absorption is forecast to rise to 118.8 million square feet in 2003 and an additional 137.8 million square feet in 2004. Vacancy rates should slide to 15.4 percent in 2003 and 13.9 percent in 2004. Average rents are expected slip 2.3 percent in 2003 before edging up 2.5 percent in 2004.

Twenty-five metro office markets are projected to outperform other markets with above-average occupancies over the next two years, including Washington, D.C.; New York City; Los Angeles; Orange County, Calif.; San Diego; Sacramento; Seattle; Charlotte, N.C.; Miami; Baltimore; St. Louis; Long Island, N.Y.; Columbus, Ohio; Stamford; Richmond, Va.; Inland Empire; Cincinnati; Jacksonville, Fla.; Norfolk, Va.; Palm Beach County, Fla.; Honolulu; Las Vegas; Indianapolis; Salt Lake City; and Fort Lauderdale, Fla.

Warehouse Market Increases in business inventories sparked demand for space in the warehouse sector. Net absorption in the 54 metro markets tracked doubled to 9.9 million square feet in the third quarter, with large regional distribution centers such as Inland Empire, Dallas-Fort Worth, Los Angeles, Chicago and Atlanta leading the way. At the same time, completions of new warehouse space declined to a total of 22.3 million square feet compared with 37.4 million square feet a year ago. The vacancy rate rose to 10.4 percent compared to 8.6 percent in the third quarter of 2001.

On average, warehouse rents declined 4.6 percent from a year earlier although San Diego, Honolulu and the Kansas City area managed modest gains. Construction starts of new space were 31.5 million square feet in the third quarter, down from 45.6 million square feet in the same period in 2001.

Based on rent growth in the third quarter, the strongest warehouse markets were San Diego, up 1.9 percent from a year earlier, Honolulu, up 1.6 percent, and Kansas City, up 1.0 percent.

With a continuing rebound in the manufacturing sector, demand for warehouse space will climb with a net absorption gain of 91.4 million square feet in 2003 and an additional 123.1 million in 2004.

Construction completions are projected to total 60.8 million square feet in 2003 and 43.6 million in 2004. The national vacancy rate is expected to be 9.8 percent in 2003, then shrink to 8.2 percent in 2004. Warehouse rents are expected to decline an average of 2.5 percent in 2003 and then rise 0.7 percent in 2004.

Twenty-six of the 54 metro warehouse markets are expected to experience above-average occupancy gains over the next two years, including Los Angeles; St. Louis; East Bay, Calif.; Chicago; Houston; Dallas-Fort Worth; Seattle; Jacksonville; Kansas City; Denver; Fort Lauderdale; Cincinnati; Miami; Detroit; Orange County; Indianapolis; Tampa; Salt Lake City; San Diego; Phoenix; Las Vegas; Palm Beach County, Fla.; Milwaukee; Oklahoma City; San Francisco; and Honolulu.

Retail Market Net absorption of retail space rose in the 54 metro markets tracked to a total of 13.0 million square feet in the third quarter, compared with a contraction of 10.9 million square feet a year earlier. At the same time, retail space completions totaled 27.0 million square feet of new space. With available space rising faster than absorption, the average retail vacancy rate climbed to 12.8 percent in the third quarter, up from 11.3 percent in the third quarter of 2001. Rents declined an average 1.1 percent from a year earlier, although 17 markets reported rent increases. Construction starts totaled 32.0 million square feet in the third quarter, the lowest since the first quarter of 1997.

Based on rent growth, the strongest retail markets in the third quarter of 2002 were in Inland Empire, up 3.7 percent from a year earlier; Norfolk, Va., up 2.5 percent; Tampa, up 2.1 percent; Kansas City, up 1.4 percent; Palm Beach County, Fla., up 1.4 percent; San Diego, up 1.2 percent; Northern New Jersey, up 1.2 percent; Long Island, up 1.2 percent; New Orleans, up 0.8 percent; and, St. Louis, up 0.7 percent from the third quarter of 2001.

In the 54 markets tracked, net absorption in the retail sector is projected at 99.9 million square feet for 2003, with another 80.5 million expected in 2004. Delivery of new space is expected to total 70.7 million square feet next year and 65.7 million in 2004. The average vacancy rate in the 54 metro markets is forecast to drop to 12.2 percent in 2003 and 11.8 percent in 2004. Retail rents should rise by 0.5 percent next year and 1.6 percent in 2004.

Twenty-one of the 54 retail markets are projected to rebound more rapidly over the next two years, including San Diego; New York; Boston; Orange County; Washington; Chicago; Los Angeles; Phoenix; East Bay; San Francisco; Long Island; Sacramento; Seattle, Fort Lauderdale; Portland; Minneapolis; San Jose, Calif.; Salt Lake City; Austin, Texas; Stamford; and Milwaukee.

Multifamily Market In the multifamily sector, low mortgage interest rates continued to draw people out of the rental market and into homeownership. Net absorption was nearly 18,500 units during the third quarter in the 54 metro markets tracked, up from 6,100 units in the third quarter of 2001. Completions of new rental apartments came to 41,500 units in the third quarter, 10.0 percent below the 20-year quarterly average. With completions continuing to outpace absorption, the vacancy rate in the third quarter rose to 7.0 percent, up from 5.6 percent a year ago. Average rents fell 1.4 percent below the third quarter of 2001, although 22 markets realized some rent gains. Construction starts of new apartments totaled 57,400 units in the third quarter, down from 60,500 units a year ago.

Based on rent growth, the hottest multifamily markets in the third quarter were in Honolulu, up 13.6 percent from a year earlier; Norfolk, up 6.5 percent; Sacramento, up 4.3 percent; Inland Empire, up 4.1 percent; Baltimore, up 3.7 percent; Long Island, up 3.4 percent; Hartford, up 3.0 percent; Jacksonville, up 2.9 percent; Los Angeles, up 2.4 percent; and Orange Country, up 2.4 percent from the third quarter of 2001.

The apartment rental market is projected to experience a net absorption of 155,700 units in 2003 and another 124,400 units in 2004. Completions of new apartments will total 110,600 units in 2003 and 80,000 in 2004. The average vacancy rate is expected to fall from 6.6 percent in 2003 to 6.2 percent in 2004, with average rent expected to be flat during 2003 before rising 2.5 percent in 2004.

Twenty-two of the 54 metro apartment markets are expected to have the most favorable demand/supply fundamentals over the next two years, including Minneapolis, Chicago, Boston, Northern New Jersey, San Francisco, New York City, East Bay, Orange County, San Diego, Los Angeles, Detroit, Seattle, Inland Empire, Portland, Sacramento, Pittsburgh, Fort Lauderdale, San Jose, Norfolk, Nashville, Long Island, and Honolulu.

The National Association of Realtors(r), "The Voice for Real Estate," is America's largest trade association, representing more than 840,000 members involved in all aspects of the residential and commercial real estate industries.

In addition, the Realtors(r) Commercial Alliance, formed by NAR in 1999, serves the needs of the commercial market and the commercial constituency within NAR, including commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and NAR affiliate organizations. These organizations include the CCIM Institute, the Institute of Real Estate Management, the Realtors(r) Land Institute, the Society of Industrial and Office Realtors(r), and the Counselors of Real Estate. The RCA also provides commercial products and services.

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(a)Analysis by NAR; data provided by Property & Portfolio Research (PPR), which provides independent real estate research and portfolio strategy services to the institutional real estate community. Collection of commercial statistics lags behind the residential market because comparable databases are not yet available. The next commercial market release is scheduled for March 18.

Information about NAR is available at http://realtor.org. This and other news releases are posted in the Web site's "News Media" section under NAR News Releases. More detailed information about the association's outlook for commercial real estate markets, as well as other real estate industry statistics and surveys, may be found at http://realtor.org/research.

REALTOR(r) is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS(r) and subscribe to its strict Code of Ethics.