National Association of Realtors: Commercial property market expected to improve gradually

The office, warehouse, retail and multifamily real estate markets can expect overall improvement through 2005, according to a forecast released Nov. 7 at a commercial real estate forum during the annual National Association of Realtors Conference & Expo in San Francisco.

David Lereah, NAR's chief economist, said the forecast, part of the association's Commercial Real Estate Quarterly, points to a gradual improvement in the major commercial sectors.

"The commercial real estate market can generally expect absorption of space to rise and vacancy rates to decline over the next two years," he said. "The improving economy means there will be more job creation and a greater need for space, while a growing population will support multifamily housing."

The NAR analysis covers a wide range of statistics and market rankings for the major commercial sectors in 54 markets tracked, including the office, warehouse and retail markets, and market sector forecasts. It is produced with data provided by Property & Portfolio Research.

Lereah noted the commercial sector has been relatively flat this year.

"Although the housing market has been booming, the commercial real estate market has been lagging," he said. "The commercial real estate recovery has been taking some time to materialize because the growth in the economy hasn't translated into a stronger job market but that will improve and should be apparent a year from now with unemployment expected to drop to 5.6 percent by the fourth quarter of 2004."

Office space

Office vacancy rates in the 54 markets should decline to 16.4 percent in 2004 from an estimated 17.7 percent this year. Net absorption of office space, which includes leasing of new buildings coming on the market as well as space in existing properties, is projected to rise to 114.3 million square feet next year from only 37.9 million in 2003. Average office rents are expected to rise 6.3 percent next year and 5 percent in 2005 after increasing 5.2 percent this year.

Warehouse

Warehouse net absorption is forecast at 55.2 million square feet in 2004, down from a projected 82.3 million this year, while the national vacancy rate is expected to drop to 9.3 percent next year from 10.4 percent in 2003. Warehouse rents are seen to decline an average of 2.4 percent this year and 0.3 percent in 2004. However, rents should rise 2.5 percent in 2005 with net absorption of warehouse space forecast to rise to 60.8 million square feet.

Retail

In the retail sector, net absorption is projected at 112.7 million square feet for 2004 after reaching an estimated 98.9 million this year. The average vacancy rate for retail space in the 54 metro markets is forecast to drop to 11.5 percent next year compared with 12.3 percent for 2003. Retail rents should rise by 1.2 percent in 2004 and 1.6 percent in 2005 after slipping 0.8 percent this year.

The National Association of Realtors represents more than 962,000 members involved in all aspects of the residential and commercial real estate industries.