Realtors Expect Lower Vacancy Rates in All CRE Categories

Vacancy rates in all the four major commercial property types are likely to decline this year as the commercial real estate market improves, according to the National Association of Realtors.

David Lereah, the association's chief economist, expects that commercial real estate vacancy rates will continue to move down over the next two years.

There was a 53% increase in commercial real estate-related transaction volume last year, in comparison to volume for 2003, the NAR reports, with multifamily and office properties seeing the biggest gains.

Considering the major property sectors, commercial real estate investment totaled $181.4 billion for 2004, compared with $118.8 billion for 2003, not taking into account transactions under $5 million, the NAR reports.

Foreign investors spent over $12 billion on U.S. commercial real estate last year, 75% of which was on office property.

Real estate investment trusts focused their efforts on the retail sector, accounting for about 14% of transaction volume in this sector.

Al Mansell, CEO, Coldwell Banker Residential Brokerage, Salt Lake City, and NAR president, noted, "Even with healthy economic growth over the last couple years, job creation really didn't pick up until 2004. Those jobs have fueled the need for commercial space, so the market is on solid ground and is experiencing a growing demand."

The NAR report is based on an analysis of data related to the office, retail, industrial and multifamily markets in 57 metro areas - provided by Torto Wheaton Research and Real Capital Analytics - the trade association reports.

Office vacancy rates in these 57 markets are expected to decline to 14.2% this year from 15.4% in 2004. And the forecast calls for office rents to rise by 2.8% in 2005, after gaining 0.4% for 2004.

Increased absorption of space and a slowdown in the amount of new space coming to the market are combining to improve office fundamentals.

The lowest office vacancies are in New York; Long Island, N.Y.; Ventura County, Calif.; Washington, D.C.; and Orange County, Calif.

All these areas have vacancy rates of 11% or less, the NAR reports.

However, net absorption of office space is expected to go down to 61 million square feet in 2005, from 77.7 million square feet for 2004.

Vacancies are expected to decline to 6.1% in the multifamily sector, from 6.2% for 2004, and average rent is expected to rise 2.1% for 2005, following a 1.5% rise in 2004.

The lowest apartment vacancy rates of 3.5% or less are in Northern New Jersey; West Palm Beach, Fla.; Fort Lauderdale, Fla.; Los Angeles and San Diego.

Net absorption in the multifamily sector is expected to go down to 238,600 units for 2005, from 264,300 units for 2004. This compares with the 159,400 units absorbed for 2003.

Merger activity could possibly lead to some store closings in the retail sector, the NAR expects.

Even then, the average retail vacancy rate is expected to drop down to 6.5% this year from 7.5% for 2004.

Net absorption of retail space is projected to go up to 34.9 million square feet in the areas tracked, from 27.1 million square feet for 2004.

The retail markets with the lowest vacancies of 3.8% or less include Washington, D.C; Oakland, Calif.; San Diego; Nashville, Tenn.; and Portland, Ore.

Demand for warehouse and distribution space has helped the industrial sector. The national vacancy rate in this sector is expected to go down to 10.4% for the year from 10.9% for 2004. And industrial rents are expected to rise 0.7% in 2005, following a decline of 0.6% for last year.

The markets with the lowest industrial vacancies are Los Angeles, Long Island, Orange County, West Palm Beach and Riverside, Calif.

Net absorption of industrial space is expected to decline to 134.8 million square feet for 2005, from 176.5 million for 2004.

For 2003, net absorption of industrial space was 16.5 million square feet, according to the NAR.

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