The recent deep economic downturn has had a pronounced impact on commercial real estate sectors, but credit availability is the big unknown that will determine how soon commercial markets recover, according to the NATIONAL ASSOCIATION OF REALTORS®.
Lawrence Yun, NAR chief economist, said some initial movements earlier this week in commercial mortgage-backed securities are encouraging. The first commercial mortgage bond deal in over a year shows the Federal Reserve's efforts to sell securities through the TALF program can be fruitful, but the level of activity is well below what is required to resuscitate the commercial market. Credit availability needs to significantly rebound for any hope of a meaningful commercial recovery in 2010.
The Commercial Leading Indicator for Brokerage Activity rose 0.9 percent to an index of 102.4 in the third quarter from 101.5 in the second quarter, but is 11.1 percent below a reading of 115.3 in the third quarter of 2008. The index in the second quarter was at the lowest level since the first quarter of 1994; NAR's track of the commercial leading indicator dates back to 1990.
Yun said the modest index recovery follows steep declines in the past several quarters. Gains in industrial production, durable goods shipments and retail sales; a rebound in the NAREIT price index; and improving figures on first-time unemployment claims were stabilizing factors, he said. Negative impacts include falling private sector income and fewer jobs involving commercial real estate. The office and industrial markets are the sectors most negatively impacted by the economic downturn.
The Society of Industrial and Office Realtors, in its SIOR Commercial Real Estate Index, a separate attitudinal survey of more than 710 local market experts,2 suggests a lower level of business activity in upcoming quarters with recessionary impacts on the industrial and office markets, although 47 percent of members are more hopeful about the near-term outlook.
The SIOR index has declined for 11 consecutive quarters and stood at 35.3 in the third quarter, compared with a level of 100 that represents a balanced marketplace. Even though it is a buyer's market with lower prices, investment activity continues to decline from the lack of credit, and 85 percent of respondents report development is virtually nonexistent in their markets.
Looking at the overall market, commercial vacancy rates are rising and rents are declining, according to NAR's latest COMMERCIAL REAL ESTATE OUTLOOK. The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.
Vacancy rates in the office sector are expected to rise from 16.1 percent in the third quarter to 18.5 percent in the third quarter of 2010, with job losses continuing to dampen the market.
Annual office rent should fall by 12.1 percent this year and decline another 8.5 percent in 2010. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is seen at a negative 56.1 million square feet in 2009 and a negative 43.3 million next year.
Industrial vacancy rates are forecasted to rise from 13.5 percent in the third quarter of this year to 15.4 percent in the third quarter of 2010.
Annual industrial rent is projected to fall 10.8 percent this year and another 11.5 percent in 2010. Net absorption of industrial space in 58 markets tracked is likely to be a negative 298.7 million square feet this year, and a negative 140.5 million in 2010.
With much of the construction in recent years customized for specific industrial needs, there is an overhang of obsolete structures on the market. There is an opportunity for non-current owners to look at distressed industrial properties in the current market, Yun said.
Retail vacancy rates will probably rise from 12.2 percent in the third quarter to 13.0 percent in the third of 2010. Near term, retail is the most hopeful commercial sector with an expected rise in consumer confidence, resulting from a restoration of housing wealth as home prices stabilize and begin to rise around the spring of next year, Yun said.
Average retail rent should decline 1.3 percent in 2009 and 3.0 percent next year. Net absorption of retail space in 53 tracked markets is forecast at a negative 21.9 million square feet this year and a negative 4.7 million in 2010.
The apartment rental market - multifamily housing - is impacted by higher home sales to first-time home buyers. However, as the economy turns around and consumer confidence returns, constraints on household growth will be released, which may help to unleash a pent-up rental demand, Yun said. Multifamily vacancy rates are projected to be fairly steady, edging up from 7.3 percent in the third quarter of 2009 to 7.4 percent in the third quarter of next year.
Average rent is likely to decline 4.1 percent this year, moderating to a 3.3 percent loss in 2010. Multifamily net absorption is forecast at 168,300 units in 59 tracked metro areas in 2009 and 59,700 next year.