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Weak Economy Bogs Down Commercial Real Estate
Commercial real estate vacancies are increasing and investment has dropped sharply in the wake of the credit crunch, according to preliminary information for the latest Commercial Real Estate Outlook of the National Association of Realtors (NAR).
With a growth in inventory, office vacancy rates are projected to increase to 13.7 percent in the fourth quarter of this year from 12.5 percent in the fourth quarter of 2007. As a result, annual rent growth in the office sector is expected to be a more modest 3.0 percent this year, following an 8.0 percent jump in 2007.
Estimates for the second quarter show vacancies rising sharply in Phoenix and West Palm Beach, Fla., to nearly 20 percent, double the levels of a year ago. Other central business districts in Florida have shown notable increases. The housing market downturn is having a spillover effect on commercial real estate in some local areas.
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, is likely to total 31.3 million square feet this year, about half of the 60.0 million absorbed in 2007.
"Although the supply-demand fundamentals are broadly favorable in most commercial real estate markets, vacancy rates are rising modestly and rent gains are slowing," says Lawrence Yun, NAR chief economist. "Slow economic growth is lowering demand for commercial space, mostly in the office and industrial sectors. Despite the slowdown, the commercial real estate market is in much better shape compared to conditions during the 2001 recession."
Tight credit availability has also significantly slowed the volume of commercial real estate transactions, says Patricia Nooney, chair of the Realtors Commercial Alliance Committee.
Investment in commercial real estate during the first four months of 2008 was $48.2 billion, down 69.5 percent from $157.8 billion during the same period in 2007 when the credit markets were functioning normally. These totals do not include transactions valued at less than $5 million or investments in the hospitality sector.
Office building transaction volume has dropped significantly. In the first four months of 2008, a total of only $18.5 billion in office buildings traded hands, compared with $95.0 billion during the same timeframe in 2007. The greatest decline was in suburban markets.
The NAR forecast in four major commercial sectors analyzes quarterly data for various tracked metro areas. The sectors are the office, industrial, retail and multifamily markets. The full report will be available in early July.