Commercial Market Projection (the end of first April Week-04/04/2008)

Most media reports about real estate conditions focus on residential housing. This has certainly been true as home sales and home prices have suffered downturns over the past year. But the commercial real estate sector has, for the most part, not experienced the same levels of negative performance. NAR recently released its latest Commercial Real Estate Outlook.*

The report – which details statistics on office, industrial, retail and multifamily property sectors for the 4th quarter of 2007 and projections for the first quarter of 2008 – indicates that while investment in commercial real estate has recently decreased to levels not seen in four years, the underlying fundamentals (vacancy, rent growth, absorption) have remained relatively buoyant.

Investment in commercial real estate in 2007 totaled $427.2 billion – a record-setting level, and a 39.2 percent increase from the previous record of $306.8 billion set in 2006. (Note: this total excludes transactions valued at less than $5 million or investments in the hospitality sector.) But this record-setting pace will not last. NAR projects that the investment dollar volume this year could drop by 30 to 40 percent compared to 2006 levels. Office MarketOffice building transaction volume in 2007 totaled a record $211.0 billion, compared with $133.5 billion for 2006. Equity funds accounted for 40 percent of office investment last year.

With the U.S. dollar at historic lows against many foreign currencies, foreign investors were also active, having purchased a record $17.7 billion in office buildings last year.The level of new supply will be greater this year. Consequently, the office vacancy rate is expected to rise to 13.3 percent in the fourth quarter from 12.5 percent in the last quarter of 2007. Estimates for the first quarter show areas with the lowest office vacancies include New York City; Honolulu; Long Island, N.Y.; and San Francisco, all with vacancy rates of 9.4 percent or less. Net absorption of office space in 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, should total 38.5 million square feet in 2008, down from 57.3 million last year. Annual rent growth in the office sector is forecast at 3.5 percent in 2008, following an 8.0 percent gain last year. There is a lag factor in the current office market to backfill space by tenants who moved into newly constructed space.

At the same time, concerns about the overall economy are causing some tenants to put expansion or relocation plans on hold. These present a challenge to timely and cost-effectively lease space in older office buildings.Industrial MarketIndustrial activity remains strong in port and distribution hubs, with relative weakness around many manufacturing centers. International trade continues to play a pivotal role in industrial real estate. Investment in industrial properties totaled $46 billion in 2007, compared to $38.9 billion in 2006. While institutions and private buyers are responsible for the majority of industrial acquisitions, institutions have actually scaled back their acquisitions for the second year in a row. Private equity funds increased their appetite for industrial real estate with a number of portfolio deals having occurredlast year.

While foreign investors increased their activity in the industrial sector, they only accounted for 5 percent of transaction volume in 2007.Vacancy rates in the industrial sector will probably average 9.6 percent in the fourth quarter of 2008, up from 9.4 percent in the same period last year. The areas with the lowest industrial vacancies include Los Angeles; San Francisco; Tucson, Ariz.; Salt Lake City; Orange County, Calif.; and Portland, Ore., all with vacancy rates of 6.1 percent or less. Los Angeles is expected to remain a landlord’s market for the next four to five years. Net absorption of industrial space in 58 markets tracked is likely to total 134.7 million square feet in 2008, up from 120.2 million last year. Annual rent growth is projected at 3.3 percent by the fourth quarter, down from 3.6 percent at the end of 2007. Retail MarketLike other commercial sectors, retail experienced a record transaction volume in 2007. A total of $71.6 billion worth of retail real estate traded hands, up from $46.9 billion in 2006, with 87 percent occurring in the first three quarters of the year. But activity is down year to date in 2008; transaction volume is just $2.2 billion through the first quarter of this year, a year-over-year decrease of 57 percent. REITs accounted for a quarter of retail transaction volume last year.The supply of new retail space is finally being held in check, although secondary markets might be growing because new space often follows population growth. As secondary and tertiary market populations continue to grow, it will become necessary to track those markets in addition to monitoring older retail centers.

Multifamily MarketThe apartment rental market – multifamily housing – is attracting risk-averse institutional investors. Of the record $98.6 billion spent in this sector last year, 40 percent of acquisitions were from institutional investors such as pension funds and life insurance companies. Private investors were equally active, accounting for another 40 percent of transactions. This activity is being fueled by otherwise first-time home buyers, who are still “waiting out” the housing downturn before deciding to purchase. In the meantime, they continue to rent, placing downward pressure on multifamily vacancy rates and upward pressure on rents. The number of new multifamily units remains relatively high, due in part to the conversion of condo projects into rental buildings – notably in the Washington, D.C., area and South Florida.The multifamily vacancy rate should average 4.8 percent in the fourth quarter, down from 5.1 percent in the fourth quarter of 2007. The current national vacancy rate is 4.7 percent, below the 5.0 percent level which is considered landlord’s market. The areas with the lowest apartment vacancies include Northern New Jersey, San Jose, Miami, Salt Lake City and San Diego, all with vacancy rates of 2.9 percent or less. Average rent is projected to rise 5.3 percent in 2008, up from a 3.1 percent increase in 2007.

Down the RoadDespite solid fundamentals, commercial real estate activity so far in 2008 does represent a slowdown from its level in 2007. Many analysts and investors have assumed that capital does not exist and that banks or other sources of equity have put a halt to lending for commercial real estate. This is not the case. The decline in investment activity actually has more to do with a lack of confidence by investors and lenders who are leery about current conditions and (like many potential home buyers) are taking a “wait and see” attitude. More than anything else, the decline in confidence levels is due to investor concerns and reticence about the current and future state of the U.S. economy. Until such time as confidence levels return to normal levels and investors and lenders are willing to take measured levels of risk, investment in commercial real estate in 2008 will most likely remain as much as 40 percent below transaction levels seen last year.*The COMMERCIAL REAL ESTATE OUTLOOK is published by the NAR Research Division for the REALTORS® Commercial Alliance.

Believe it or not, Utah house market is best in the nation

For the scores of homeowners who are having to cut asking prices to get their properties sold, it might not feel like Utah's real estate market could be considered the best in the country. But in a report released Tuesday by the Office of Federal Housing Enterprise Oversight, Utah is No. 1 among all states in home-price appreciation, from the fourth quarter of 2006 to the same period in 2007, with a 9.27 percent gain. It is the state's fifth consecutive quarter in the top spot. Utah's appreciation rate is down considerably from the double-digit gains of recent years. When it first topped the nation in appreciation in the fourth quarter 2006, its one-year appreciation topped 17 percent. By the third quarter of last year, appreciation had slowed to 12.9 percent before dipping even farther in the fourth quarter. But compared with many other states, coping with a much sharper residential downturn, Utah's residential real estate market is faring much better. "We do have a lot of inventory, which has caused prices to have flattened," said Realtor Bill Heiner, second vice president of the Salt Lake Board of Realtors. "But we're still doing well."

Read more on http://www.sltrib.com/ci_8370308?source=most_emailed

Commercial Real Estate

NAR: Commercial Index Eases Commercial real estate market activity is expected to decline moderately with fewer business opportunities for commercial practitioners in the months ahead, according to a forward-looking index for the commercial real estate sectors published by the NATIONAL ASSOCIATION OF REALTORS®.

The Commercial Leading Indicator for Brokerage Activity slipped 0.4 percent to an index of 120.1 in the fourth quarter from a reading of 120.6 in the third quarter. However, it remains 0.1 above the fourth quarter of 2006 when it stood at 119.9. This is the second straight quarterly dip in the index, after reaching a record of 120.7 in the second quarter of 2007.

The index showed nine consecutive quarterly gains prior to these declines; NAR’s track of the index dates back to 1990.Lawrence Yun, NAR chief economist, says the latest index suggests reduced business opportunities for commercial real estate practitioners in the months ahead. “The decline in the index implies that commercial activity, as measured by net absorption and the completion of new commercial buildings, is likely to contract moderately over the next six to nine months, which is consistent with an expectation for slower overall economic expansion in upcoming quarters,” Yun says.

Rising unemployment insurance claims and falling durable goods shipments were the key factors in lowering the CLI, but a weaker rate of return on investment as measured by the NAREIT Price Index was also a factor. However, positive contributors to the index were seen in the growth in wholesale and retail trade, and rising personal income, according to NAR.The latest data imply that investment in private nonresidential structures, which rose a solid 13.2 percent in 2007 according to a preliminary GDP estimate, could show only minimal growth or even decline in 2008, Yun says The Commercial Leading Indicator also implies weakening activity for commercial leasing and building sales activity. “Commercial practitioners can anticipate a weaker, though positive, net absorption in the office and industrial sectors later in the year with fewer new commercial buildings reaching the market,” Yun says. The index is a tool to assess market behavior in major commercial real estate sectors, which incorporates 13 variables that reflect future commercial real estate activity.

Commercial Real Estate Update

COMMERCIAL REAL ESTATE SECTORS REMAIN ON SOUND COURSE Commercial real estate sectors continue to perform well with sound market fundamentals, according to a commercial market update and forecast presented at a forum on commercial business trends at the 2007 REALTORS® Conference & Expo in Las Vegas, Nov. 13. Lawrence Yun, NAR’s chief economist, expects vacancy rates to trend down in most commercial markets next year and said recent disruptions in the mortgage market have not had a similar impact on the commercial sectors. At the same time, Yun said confidence issues have been a factor in some of the cancelled or postponed transactions. “Not all commercial investors are immune to the psychological effects of Wall Street gyrations or credit concerns, but they should take heart in that pension funds have been increasing their allocation in commercial sectors,” he said.