6.06.06

Good times to continue for commercial real estate

Falling vacancies, rising rents, and continued capital flows from private and institutional investors all promise a great 2006 and 2007 for commercial real estate, NAR’s Chief Economist David Lereah told commercial REALTORS® at NAR’s Economic Issues & Commercial Real Estate Business Trends Forum.

The highest corporate profits in 15 years and a generally strong economy – the driving force behind commercial – should ensure that all major property types, with the possible except of retail, perform well this year. Lereah expects a 3.5 percent GDP growth during 2006 as the economy adds about 2 million new jobs and wages pick up.

Office vacancies are at their lowest rates since 2001, sitting at 12.6 percent in first quarter 2006. Net absorption is almost twice the pace of construction, contributing to the 5 percent rent increase Lereah projects for the sector in 2006.

Industrial property is also strong, helped by significant import and export activity; extremely low retail inventory to sales ratios, and rising orders for durable goods. Industrial vacancies have fallen to 9.1 percent in first quarter 2006, and rising industrial production may indicate a need for more manufacturing space, said Lereah.

Resale Slowdown Will Boost Multifamily

Multifamily will benefit from the cooling housing market, job growth, and continued immigration to post rent increases of 5 percent in 2006. Slowing condo conversions and absorption that’s outpacing construction have already helped multifamily achieve a low 5 percent vacancy rate in first quarter 2006. And hotels, a new category being tracked by NAR’s Research Department, could reach an occupancy rate of 68.7 percent during 2006, the highest since the 9/11 terrorist attacks.

The one “iffy” sector for 2006 is retail. Although personal income continues to rise and retail sales remain healthy, the loss of the housing wealth effect and rising inflation are beginning to sap consumer confidence, said Lereah.

Longer-term factors such as inflation, higher oil prices, and rising construction costs could have a slowing effect on commercial demand. But for now commercial real estate is “getting better all the time,” concluded Lereah.

A quarterly update on the industrial, office, multifamily, retail and hospitality sectors is available at REALTOR.org's Commercial Home Page.

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