Commercial Realty Values May Lose Some Ballast

Commercial property prices are not likely to go up in 2008 as much as they did in previous years, according to the National Association of Realtors.

It is likely that property prices will soften considering that capitalization rates (the discount rates used by commercial real estate investors to arrive at property valuations) are already very low and are only likely to go up.

This means "the era of rapid commercial property price increases has ended," the Realtors' trade group said in a fourth-quarter 2007 commercial real estate outlook report.

And foreign buyers are expected to take advantage of the weak dollar and be more active.

Although the credit crunch has been impacting the commercial real estate sector in the last few months, 2007 has set a record for commercial real estate investment, the NAR reports.

However, tighter credit conditions mean that some individual investment deals may not be able to get done.

A record $325 billion was invested in commercial real estate in the first 10 months of 2007, up from $306.8 billion for all of 2006, the trade group reports.

(This total, based on analysis of data from Real Capital Analytics, does not include transactions valued at less than $5 million or investments in the hospitality sector.)

Commercial real estate fundamentals remain healthy and only slight increases in vacancy rates are expected for the office and industrial sectors during 2008, although credit restrictions have recently slowed overall investment activity, according to the NAR.

Lawrence Yun, NAR's chief economist, said commercial fundamentals are essentially sound. "Although vacancy rates remain relatively low for all sectors, they are expected to rise slightly in the office and industrial markets during the coming year because much of the space being absorbed is in high-quality buildings or is built-to-suit," he said.

"As a result, there is a fair amount of older space on the market, particularly in the industrial sector where obsolescence is a factor, although industrial rents are showing healthy gains. Vacancy rates in the retail and multifamily sectors are projected to tighten in 2008 with rents rising in all sectors."

Patricia Nooney of St. Louis, chair of the Realtors Commercial Alliance, said commercial real estate investment is expected to stay historically strong. "Even with the credit crunch there's been no significant impact on institutional investors, and it's unrealistic to set new records every year in a cyclical business," she said. "There's been a shift in investment activity to foreign buyers, who are taking advantage of the dollar's decline relative to other currencies. With many areas showing favorable fundamentals, commercial property in the U.S. has become very attractive to foreign investors."

The NAR forecast tracks activity in the office, industrial, retail and multifamily markets, with historic metro data provided by Torto Wheaton Research and Real Capital Analytics.

In the multifamily sector, there is more demand for apartment units following a slowdown in home sales. With a rising population and a growing number of households, vacancies are tightening and rents are rising.

Multifamily vacancy rates are expected to be at 5.1% by the end of 2008, down from 5.4% in the fourth quarter of 2007. Average rent is likely to rise 3.8% for 2008, up from 3.1% for 2007 and following a 4.1% increase in 2006.

Multifamily net absorption is expected to total 245,800 units in 59 cities tracked for 2008, up from 234,400 units in 2007.

The areas with the lowest apartment vacancies include Northern New Jersey, Salt Lake City, San Jose, San Diego, Nashville and Philadelphia, all with vacancy rates of 3.3% or less.

Multifamily transactions in the first 10 months of 2007 totaled $62.3 billion, compared with $87.4 billion for all of 2006. Some buildings originally constructed as condos are being sold to multifamily investors in markets like Washington, D.C., and South Florida. Many markets have seen condo "for sale" signs change to "apartment for lease" signs almost overnight. Some condominium complexes are being converted into office buildings, and others are becoming mixed-use projects. In the office sector, investment grade office properties with solid income streams are expected to be the most in demand by institutional investors, equity funds and foreign investors. Since not all of the vacated space is being back-filled or leased, office vacancies are forecast to rise to 13.2% by the fourth quarter of 2008. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/

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