Lereah spoke at the NAR Economic Issues & Commercial Business Trends forum last week.
Commercial construction has remained relatively stable for the last two years and has been outpaced by absorption during 2004. As a result, commercial returns continue to climb.
Retail returns have led commercial performance over the last year, with rent growth projected at 4.4 percent for 2005. However, going forward, office shows the greatest potential for upside, especially in the West and Northeast, predicted Lereah.
Office rents are beginning to gain traction, up 2.3 percent in 2005 and 3.4 percent in 2006. Vacancy rates will near 14 percent nationwide by the end of this year, and by 2006 that rate could drop to about 13 percent.
Industrial vacancies should fall to 10.3 percent in 2005, although the market has bifurcated with older, less functional properties facing much higher rates. Multifamily vacancy rates have remained stable in the 6 percent to 7 percent range. Record rates of homeownership have kept multifamily fundamentals from improving rapidly, Lereah said. Vacancy rates might drop to about 5 percent by 2006.
Nevertheless, a stalling economy and the twin threats of high budget and trade deficits could spell trouble for the economy — and thus commercial properties — in the longer term, said Lereah. He noted that business spending stalled and durable goods order fell sharply in the first quarter of 2005, despite the fact that corporate profits remain strong. The upside in this scenario is that the Federal Reserve won’t have to raise rates significantly, said Lereah. He expects spreads between three-month bonds and 10-year Treasuries to widen.
Lereah said he doesn’t think that recession or high inflation lies ahead, although that prediction could change if oil moves between $60 and $70 a barrel.
