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Commercial Real Estate: Bright Outlook
By Alvin Arnold
Midway through the year, the current Commercial Real Estate Outlook of the National Association of Realtors (NAR), sees a healthy demand for space driving commercial real estate markets. The NAR represents more than 1.3 million members involved in all aspects of residential and commercial real estate and its forecast covers the five major commercial sectors: office, industrial, retail, multifamily, and hospitality. Market data was provided by Torto Wheaton Research and Real Capital Analytics.
Office Markets
Rising oil prices and slower job growth will dampen expectations for the office market, but vacancy rates still are likely to drop to an average of 12.7 percent in the fourth quarter of the year from 13.6 percent last year. Office rents are forecast to rise 4.4 percent this year.
Large institutional investors and pension funds returned to the office market in the first quarter, more than doubling the amount spent in all of 2005. Top markets were Manhattan, Chicago, Los Angeles, San Francisco, Northern Virginia and Washington, D.C.
In a separate report, GRA National Real Estate Index reported that CBD office cap rates in the first quarter dropped to 6.8 percent from 7.2 percent in the last quarter of 2005, while cap rates for suburban office dropped to 7.0 percent from 7.4 percent in the same period.
Retail Market
The NAR report says that retail market absorption is matching new supply so that vacancy rates are projected to be stable for the balance of this year at an average of 7.8 percent, slightly higher than the 7.2 percent in the last quarter of 2005. Average rent is likely to grow less than one percent this year. Higher energy costs and slower home price appreciation will hold back consumer spending, while overbuilding and fallout from mergers and acquisitions are impacting certain markets, including regional shopping centers.
According to GRA National Real Estate Index, retail cap rates dropped to 7.1 percent in the first quarter, down from 7.7 percent in the last quarter of 2005.
Apartment Market
The NAR Outlook sees rental apartment vacancy rates in the fourth quarter averaging 5.7 percent compared to 6.2 percent at the end of 2005. Average rent is forecast to rise 4.1 percent this year compared with 2.9 percent last year.
On the one hand, conversion of apartments for condos is waning somewhat, while on the other hand, a slight softening in the housing market is boosting rental demand. Concerns about job security are playing a role in keeping some people in the rental marketplace. The top markets for apartment investment over the last year were Manhattan, Phoenix, Los Angeles, Tampa, Orlando and Atlanta.
According to GRA National Real
Estate Index, cap rates for Class A
apartments dropped to 6.0 percent
in the first quarter, down from 6.5 percent
in the last quarter of 2005. Cap
rates for Class B apartments dropped
from 7.4 percent to 7.0 percent.
Industrial Market
According to the NAR, industrial vacancy rates are forecast to decline to an average 9.5 percent during the second half of the year from 9.9 percent in the final quarter of 2005. New construction is increasing, but this is matched by space absorption. Trade with China continues to fuel demand for warehouse and distribution space. While market fundamentals appear to be healthy, industrial rents may increase only 1.9 percent this year. The lowest vacancy rates are in West Palm Beach, Florida, Los Angeles, Fort Lauderdale, Las Vegas, Miami and Orange County, California, all with rates of 5.4 percent or less.
According to GRA National Real Estate Index, cap rates for warehouse properties dropped to 7.5 percent in the first quarter from 8.0 percent in the final quarter of 2006.
Hospitality Market
The NAR says hotel occupancy should reach 63.4 percent this year, just under the 64.5 percent of last year. Revenue per available room (RevPar) is projected to reach $72.37 this year, up 7.5 percent from $70.47 last year. The hotel inventory should rise by about 17,500 rooms this year, up from 5,600 last year. Markets with the highest amount of construction include Houston, Orlando, Fort Worth, Washington, D.C., Atlanta and San Diego,
Alvin Arnold is the editor of the Monitor. He can be reached at (212) 885-8235.
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