Multifamily Rentals Leading Commercial Market to Slow Recovery

by devteam November 28th, 2011 | Share

While the commercial real estate marketsrnare reflecting the overall softness of the economy, there are some signs of improvementrnaccording to data released today by the Society of Industrial and OfficernRealtors® (SIOR.)  SIOR, a division ofrnthe National Association of Realtors®, reports that its Commercial Real EstaternIndex, which fell 2.6 points in the second quarter of 2011 after six quartersrnof growth has recovered slightly (+0.6 points) in the third. </p

The Index, derived from a survey of 231rnlocal market experts and based on 10 market variables (unspecified by SOIR), isrnnow at 5.5 after rising as high as 57.5 in the first quarter of the year.  An index level ofrn100 represents a balanced marketplace.  That level was last reached in the third quarterrnof 2007.  Ninety-two percent ofrnrespondents reported that the economy is having a negative impact on theirrnlocal market.</p

SOIR expects things torncontinue its slow improvement over the next four quarters, with vacancy rates decliningrnmodestly and rents gradually rising</p

Lawrence Yun, NAR chief economist, said there is little change in most of the commercialrnmarket sectors.  “Vacancy rates are flat, leasing is soft and concessionsrncontinue to make it a tenant’s market,” he said.  “However, with modestrneconomic growth and job creation, the fundamentals for commercial real estaternshould gradually improve in the coming year.</p

The strongest forecastrnis for multifamily housing where the vacancy rate is already the lowest of anyrnsector.  The fourth  quarter 2011 rate is projected at 5.0 percentrnand is expected to drop to 4.3 percent by Q4 2012.  Multifamily vacancy rates below 5 percent arerngenerally considered a landlord’s market with demand justifying higher rents.</p

Yun sees therntightening market leading to rates trending modestly higher in 2012. Averagernapartment rent is projected to rise 2.5 percent this year and another 3.5 percentrnin 2012, however Yun is even more optimistic; “If newrnmultifamily construction doesn’t ramp up,” he said, “rent growth couldrnpotentially approach 7 percent over the next two years” </p

Multifamily net absorption is likely to bern238,400 units this year and 126,600 in 2012. rnAreas with the lowest multifamily vacancy rates currently are Minneapolis, 2.4rnpercent; New York City, 2.7 percent; and Portland, Ore., at 2.8 percent.</p

Construction activityrnremains low; 96 percent of respondents indicate that it is lower than normalrnand 88 percent saying it is a buyers’ market in terms of developmentrnacquisitions.  Prices are below construction costs in 83 percent ofrnmarkets.</p

Vacancy rates in the office sector are expectedrnto fall from 16.7 percent in the current quarter to 16.1 percent in the fourthrnquarter of 2012 and rents will follow a 1.4 percent increase in 2011 withrnanother 1.7 percent rise.  Net absorptionrnof office space in the U.S. including leasing of both new and existing space isrnprojected to be 20.2 million square feet in 2011 and 31.7 million in 2012.  </p

Industrial vacancy rates are projected torndecline from 12.3 percent in the fourth quarter of this year to 11.7 percent inrnthe fourth quarter of 2012.  Rents willrnfinish out this year down 0.5 point but will increase 1.8 percent next year.  Net absorption of industrial space nationallyrnshould be 62.0 million square feet this year and 41.2 million in 2012.</p

Retail vacancy rates are likely to decline fromrn12.6 percent in the current quarter to 11.8 percent in the fourth quarter ofrn2012. Average retail rent is expected to decline 0.2 percent this year, andrnthen rise 0.7 percent in 2012. Retail space will be absorbed at a net raternof 1.2 million square feet this year and 13.5 million in 2012.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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