NAR Sees Slim Ray of Light for Commercial Sectors

The U.S. economy will likely avoid a recession and pick up in the second half of this year, according to the National Association of Realtors, which expects the commercial property market to turn in a mixed performance.

“Commercial fundamentals are good, but investment has been hurt by the credit crunch. Investment in the commercial sectors decelerated in the first quarter after setting a record in 2007,” says Lawrence Yun, chief economist at NAR.

Investment in commercial real estate plummeted to between $35 billion and $38 billion in the first three months of 2008, down from more than $100 billion in the first quarter of 2007. In fact, each of the first three quarters of 2007 saw commercial investment of over $100 billion, according to NAR.

The Washington-based trade group notes that commercial property performance varies by market. “We project generally softer rent growth in commercial real estate, and modestly lower business opportunities in most market areas for commercial practitioners,” says Yun. “As in the residential sector, areas with strong job growth are doing fairly well.”

States with the strongest job growth include Colorado, Louisiana, Texas, Washington, Wyoming and Utah. States that have fared the worst with job losses include Arizona, California, Florida, Michigan, Nevada and Ohio.

On an optimistic note, the NAR’s forecast calls for better performance in the retail and multifamily property sectors than in the office and industrial sectors. Yun expects to see slower absorption of space in the office and industrial sectors, considering that job gains are slowing overall.

In the office sector, the Realtors group predicts net absorption of space in 57 markets it tracks will decline to 8.7 million sq. ft. in the second quarter of 2008, a drop of more than 50% from about 21 million sq. ft. of office space absorbed in the second quarter of 2007.

The forecast calls for an average office property vacancy of more than 13% in the fourth quarter in these markets, up from 12.5% in the fourth quarter of 2007. This also means rents are likely to rise only 3.5% for 2008, after rising 8% last year.

NAR sees space absorption for industrial properties dropping to 33 million sq. ft. for the second quarter in 58 markets that it follows, a modest decline compared with more than 35 million sq. ft. absorbed in the comparable period of 2007.

Vacancy for industrial properties is likely to inch up to 9.6% in the fourth quarter of the year, compared with vacancy of 9.4% in the fourth quarter of 2007. This will contain rent growth to 3.3% by the end of the year, compared with rent growth of 3.6% by the fourth quarter of 2007.

In the 53 retail markets the Realtors group tracks, NAR expects net absorption of space to see a major gain, rising to 6.4 million sq. ft. for the second quarter of 2008. This compares with negative absorption of 169,000 sq. ft. for the second quarter of 2007. Scott McIntosh, a senior economist with the NAR, attributes the gain in retail space absorption, which is not spread evenly across markets, to a rise in construction of grocery-anchored strip centers in some suburban areas. This has attracted other retail tenants and increased absorption. In 2007, the retail sector was still feeling the negative impact of some major Macy’s store closings, McIntosh says.

Retail sector vacancies will decline to more than 8% by the fourth quarter, from over 9% at the end of 2007, NAR projects. The trade association forecasts rents for retail properties to rise on average 1.4% in 2008, compared with an increase of more than 3% for last year.

In the multifamily sector, the NAR expects net absorption to rise to 71,800 units in the second quarter, compared with 70,700 units in the second quarter of 2007. The Realtors group also forecasts multifamily vacancies will edge down to 4.8% in the fourth quarter compared with 5.1% in the fourth quarter of 2007. This is expected to help rents gain 3.8% for 2008 compared with a gain of 3.1% for 2007.

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