Commercial Real Estate Slowly Turning Around

Commercial Real Estate Slowly Turning Around
Sales and leasing volumes in commercial real estate have turned a corner and are heading up, but because the past few years have been so difficult, the upturn barely feels like one. However, the sector is expected to strengthen more over the next couple of years, NAR Chief Economist Lawrence Yun told commercial real estate practitioners on Thursday at the 2011 REALTORS® Midyear Legislative Meetings & Trade Expo in Washington.

Financing remains a major stumbling block, with little commercial mortgage backed security activity happening, but banks — particularly regional banks — are stepping in with portfolio loans, said Yun.

That’s a bit surprising, because the big-four national banks — Wells Fargo, Citibank, Chase, and Bank of America — are in a far better position to make loans. Not only are they sitting on piles of money, but because they’ve grown to the point where they’re too big to fail, they have a de facto implicit federal guarantee, Yun said.

A big concern looming is inflation. It remains low, about 2.9 percent (excluding energy and other volatile components to the economy), but inflation could rise and hit 5 percent by the end of the year and 6 percent in the early part of 2012, Yun predicted. If that happens, interest rate costs would also rise. For the federal government, a 2 percent increase in rates could wipe out a lot of any deficit reduction steps the government might take between now and the end of the year, because in some analyses, that could translate into $2 trillion in increased debt service payments for the government.

In the individual commercial sectors, multifamily housing has been the standout over the last year. Vacancies hit historically normal levels last year at about 5-6 percent with solid rental rate growth. Look for 4 percent higher rents nationally by the end of this year. That figure could be considerably higher in some first-tier markets like Washington, D.C., where rental rates have been rising at almost a double-digit clip.

Those gains might ease in the next year or two, though, as residential home sales improve. The high rental rate increases could tip the scale for some renters to consider home ownership. Yun has said on other occasions that almost 40 percent of the renter population today has the financial ability to become home owners, but for now are choosing to rent.

In the office market, vacancy rates are expected to decline steadily, from 16.5 percent in the first quarter of this year to 16 percent at the end of the year. Rental rate increases could turn positive for the first time in a while, too, to maybe 5 percent from a negative 2 percent. Offices are benefitting from recent job gains in professional service-type jobs like accountants and lawyers.

Among markets tracked by NAR, New York City has the lowest vacancy rate at a little over 8 percent. Washington, D.C., with its federal government-fueled activity, also has a relatively low vacancy rate. Pittsburgh, which has been steadily transitioning from an industrial city to a high-tech and professional services city, is among the metros with relatively strong office trends.

Industrial markets are also expected to improve, with vacancy rates projected to decline from 14.2 percent to about 12.9 percent at the end of the year. Yun is predicting positive rental rate growth of about 2 percent this year. Los Angeles, with its big Asia import-export trade, has the lowest vacancies at 7.5 percent.

Retail markets continue to struggle, with consumers still retrenching in their spending. In the long run, increased savings by consumers is good, because it boosts household financial stability, Yun said, but in the short term retail properties are getting little relief. Vacancy rates are only expected to improve marginally, from about 13 percent to just slightly better by the end of the year. Even so, the sector might see some improvement in rental rate growth, moving from a negative 1 percent to 1 percent in positive territory by the end of the year. San Francisco is in the best shape among major metro areas with a vacancy rate of about 6.7 percent.

You might not “feel the impact of the recovery,” Yun said. “The hole was so deep, it might still feel like we’re in a hole.”

— Robert Freedman, REALTOR® Magazine

About Ady Simion (Realtor and Public Notary)

Ady Simion was named in the Top 1% of all agents for NRT LLC a subsidiary of Realogy that operates a variety of real estate offices under brands such as Coldwell Banker, Sotheby's International Realty, Century 21, The Corcoran Group, and the technology-based brokerages ZipRealty and Climb Real Estate. NRT has 787 offices and 47,000 sales associates. Selling and buying property can be very stressful but with the right agent it can be profitable and a fun experience. Ady is also a Notary Public and being a people person he wants to help negotiate for his clients making their transactions as smooth as possible. Ady’s goals are simple: He wants to be the best source of information on the Los Angeles area Real Estate market, as he assists clients through each transaction with care and professionalism. He is proud of his large referral base of clients who have placed their trust in him over the years. Why him, when there are so many good people out there?!?! • Sellers will have their property exposed to the largest team of sales professionals in the world by far. Coldwell Banker Agents sale more homes than anyone else. • Buyers will have the opportunity to view more properties exclusively. • And most importantly when you hire him you get a whole team working for you not just “only one person”. Ady Simion started his Professional Career as an Insurance Agent, and then mastered the Mortgage Industry focusing on helping buyers and sellers achieve their life dreams. He now is an Agent with the Largest Residential Real Estate Company in the nation and the world, Coldwell Banker, at the Pasadena office which is the leader in the areas in which he specializes. After finishing College Ady has consistently been a Top Producer in every office/business he worked at. He speaks English, Romanian and Spanish. Real Estate is constantly changing and working with an agent that has been involved in the Real Estate buying/selling process most of his life is always beneficial for clients. Call, text or e-mail him or just stop by to say Hi and ask any real estate questions you may have.

Posted on May 13, 2011, in Uncategorized. Bookmark the permalink. Leave a comment.

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