By George Ratiu, Research Economist

The REALTORS® Commercial Real Estate Market Survey measures activity in the commercial real estate markets. The survey collects data from commercial REALTORS®. Each quarter, participants are asked to respond to questions regarding the current demand for commercial properties, price, cap rates, rental concessions and other economic conditions. The survey is designed to provide REALTOR® members with an overview of the market performance, sales and rental transactions, current economic challenges and future expectations. The questions are designed to capture the effects of the existing economic conditions on the commercial real estate business.

The latest Commercial Real Estate Market Survey was conducted in April/May and reflects conditions in the first quarter of 2009. Below we present some highlights of the survey results.

The recession has had a major impact on commercial real estate. On a national basis, commercial sales volume is off 26 percent from the first quarter of 2008 to the first quarter of this year. Sales prices
have also declined - down 15 percent from the first quarter of last year. On a quarter to quarter comparison, volume is still down, but not by as much. Sales volume declined 11 percent from the fourth quarter of 2008, and sales prices are off eight percent.

There were some bright spots. In a few states conditions improved. For instance, in Alabama, the volume of commercial sales increased both year-over-year (17 percent) and from the fourth quarter of 2008 (by 25 percent). Growth in sales volume was also registered from the previous quarter in Arkansas (10 percent), Colorado (six percent), New Jersey (11 percent) and South Carolina (one percent). And while prices for commercial properties posted negative growth on a national basis, West Virginia saw an increase of five percent in prices from the previous quarter.

Rental rates remain on a downward path. Nationally, rents are down by eight percent on a quarterly basis. The largest rental rate declines were in Montana (20 percent), Illinois (almost 17 percent), California and Nevada (both down 16 percent) and Idaho (15 percent). Commercial rental rates in Hawaii, Iowa, New Hampshire and West Virginia remained unchanged from the fourth quarter of last year, and Mississippi experienced a five percent increase.

Vacancy rates were up in most states, but the majority of states posted increases in single-digit territory. Maryland, Michigan, Mississippi, and South Carolina saw a decline in rental vacancies.

So, where are the opportunities for commercial real estate properties? According to the information we
received from our survey participants, compared with the previous quarter, the direction for commercial opportunities in commercial real estate have increased by double-digits in Montana, New Jersey, South Carolina, West Virginia and Wyoming. Nationally, commercial practitioners felt that direct business opportunities were down three percent from the fourth quarter of 2008, but that is a distinct improvement from the eight percent reported by survey participants in our previous survey.

Of course, there are challenges to taking advantage of those opportunities. As with residential properties, commercial inventory is rising, particularly for distressed properties. With the relatively low number of transactions, market pricing continues to pose a problem. The price gap between buyers and sellers is hampering many deals, as buyers expect considerable price discounts. Both the national and local economies have an impact on the health of commercial real estate conditions. Moreover, securing a commercial real estate loan is more difficult. Borrowing requirements are more stringent, the cost of borrowing continues to be high and banks' willingness to lend continues to be low in light of declining asset prices. In fact, almost 44 percent of commercial REALTORS® reported financing as their market's largest challenge, with 25 percent stating that the overall national economy was the biggest challenge.

Commercial real estate fundamentals will likely continue on a downward trend for the remainder of the year. Demand for commercial space is expected to remain negative. The industrial sector, in particular, is expected to post increased vacancies, in light of GM's and Chrysler's bankruptcies and the announced plant closings. In turn, rent growth will continue its decline. The multi-family sector remains somewhat more resilient, due to continued demand. However, even apartments are seeing increased availability and only moderate rent growth. Nonetheless, as commercial practitioners' responses indicate, commercial real estate conditions vary based on regional and local economies. As such, opportunities are likely to depend on local factors. Not all commercial markets will be sluggish and, at least based on the results of the latest commercial practitioners' survey, some may start to slowly improve.