Commercial Property Prospects Fair, Experts Say

Industry experts predict that commercial real estate growth and returns will remain steady despite a poor outlook for employment, shifting ideas about the use of office space and …

Industry experts predict that commercial real estate growth and returns will remain steady despite a poor outlook for employment, shifting ideas about the use of office space and slow economic growth. The positive outlook is based on current demand, which is slowing but still considered stable, with larger retailers are posting measured gains. Statistics indicate market players are moving forward with caution in terms of acquiring and using space; however, analysts note the important thing is forward movement in the hopes that any progress will bring the market further from the edge of a recession. For more on this continue reading the following article from National Real Estate Investor.

Volatility continued to haunt financial markets in late August through early September, and fear of a double-dip recession remains prevalent.

Even if economy does not contract sharply, how would slow growth affect the near-term prospects of commercial real estate fundamentals?

Fortunately, we already have evidence of how various property types will fare through a slow economic recovery.

The latest figures from Aug. 26 show that U.S. GDP grew by only 1% in the second quarter on an annualized basis, implying that the economy crept forward at a decidedly unhurried pace of 0.7% in the first half of 2011.

Job growth was flat in August, netting out to a paltry monthly average of 109,000 net jobs created year to date.

The U.S. economy needs to grow at an annualized rate of at least 2.5%, and produce around 200,000 jobs per month, for the unemployment rate to even begin falling.

It’s been more than two years since the recession ended, so we already have ample evidence of how commercial properties will perform through a tough slog.

Assessing real estate fundamentals

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The latest monthly data show that recovery in commercial real estate fundamentals remains mixed. Retail properties continued to lose occupied space, albeit at a measured pace compared to the hemorrhage back in 2009.

Vacancies for neighborhood and community centers hit 11% in July, just 10 basis points shy of the record high observed in 1990.

Effective rents deflated slowly, falling by 0.1% year to date through July, but it stands in marked contrast to the nascent recovery of the office sector.

Office properties notched another small gain in July, with vacancies dipping by 10 basis points to 17.4%. Occupied space has increased by 12.6 million sq. ft. since the start of the year, and effective rents have risen at a modest but consistent pace in each of the past seven months, growing by 1% through July.

The multifamily sector remains the best performer, with vacancies cratering by 80 basis points to 5.8% in July. Directly benefiting from the ongoing travails of the housing market, rental properties notched a healthy 1.4% gain in effective rents over the last seven months.

Will these patterns continue?

It is highly likely that this divergence in performance will continue through the end of 2011. “Large retailers like Macy’s and Nordstrom notched decent numbers in August, but remain guarded in their projections; expansion plans are unlikely to overreach,” says Michael Steinberg, an analyst at Reis who covers the retail sector.

Retail vacancies are projected to rise to 11.2% by the end of the year.

Office vacancies began to fall from the cyclical high of 17.6% earlier this year, but further improvements will be gradual.

“If office-using employees typically occupy 100 to 200 square feet of space, we can only conclude that employers are being very cautious about leasing new space,” says Brad Doremus, senior analyst for Reis.

“The 12.6 million square feet of positive net absorption through July translates to just about 15 square feet of new space leased per net job created — a plodding pace at best,” adds Doremus.

The prospects are better for multifamily, but not every robust projection materialized this year. “Unless job growth turns sharply negative, we probably won’t see the kind of contraction in household formation that we saw back in late 2008 and 2009,” notes Kyle McLaughlin, senior associate at Reis.

With house prices still in disarray, rental properties will benefit, McLaughlin emphasizes. “But national effective rents have not grown at the 4% to 5% rate that many thought they would. Landlords are happy to get new tenants, but are rightly capping large rent increases given the jittery job market.”

Economic growth is likely to proceed at a lackluster pace for at least the next couple of years, but we have some evidence that most commercial property types will post gradual improvement.

We expected that recovery following such a devastating recession would be a long, slow climb. Tempered expectations may be the best attitude to adopt in these volatile times.

This article was republished with permission from National Real Estate Investor.


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