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"Positive underlying fundamentals continue to support all of the major commercial real estate sectors in the United States, but a slowdown in job creation and ongoing tight loan availability has tempered growth in some areas, according to the National …
In its latest commercial real estate forecast the NAR’s chief economist Lawrence Yun says that there are mixed results among the commercial sectors. ‘Job creation in the second quarter was about half of what we saw in the first quarter, which is moderating demand in the office sector,’ he said.
‘Industrial and warehouse space is holding on better because imports and exports have advanced. While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner Canada,’ he added.
Although still positive, dampened demand is slightly moderating rent growth with the exception of the multifamily market, Yun pointed out. ‘Sharply higher demand for apartments is causing rents to rise at faster rates. A return to normal household formation will mean even lower vacancy rates and higher rents in the future,’ he added.
The current commercial real estate cycle has been driven by shifts in demand without an oversupply of new construction. ‘The difficulty small businesses have in getting commercial real estate loans for leasing or purchase is keeping a lid on demand. Multifamily is the only commercial sector with a notable growth in new space, with some lending provided through government loans,’ Yun explained.
With the exception of multifamily, vacancy rates remain above historic averages seen since 1999. Over that time frame the typical vacancy rate has been 14.4% for the office market, 10.1% in industrial, 8.1% for retail and 5.8% in multifamily.
Vacancy rates are marginally declining and rents are modestly rising in all of the sectors, but significant changes in the outlook are unlikely before the end of the year. ‘Overall companies hold plentiful cash reserves, but they are hesitant to hire without clarity over how these outstanding issues will impact the bottom line,’ Yun said.
‘Commercial real estate gains could be thwarted if lending from small and community banks dry up from excessive regulatory compliance costs, and if international big-bank capital rules are applied to smaller lending institutions,’ Yun added.
Vacancy rates in the office sector are expected to fall from an estimated 16.1% in the third quarter to 15.6% in the third quarter of 2013. The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.4%, New York City at 10% and New Orleans at 12.8%.
Office rent is projected to increase 2% this year and 2.6% in 2013. Net absorption of office space in the US, which includes the leasing of new space coming on the market as well as space in existing properties, should be 24.1 million square feet in 2012 and 47.8 million next year.
Industrial vacancy rates are forecast to decline from 10.7% in the third quarter of this year to 10.5% in the third quarter of 2013. The areas with the lowest industrial vacancy rates currently are Orange County, California, with a vacancy rate of 4.6%, Los Angeles at 4.8% and Miami at 6.8%."