Commercial Sector Looks Promising In 2005
by Al Heavens
I've noticed something over the last few years, at least since residential real estate became the main driving force of the U.S. economy: It is never as bad as the economists -- especially the ones directly involved in the housing industry -- say it is going to be. This is, of course, a good thing, because it is much better to have egg on your face if the news is good than if the news is terrible. So when David Lereah, chief economist of the National Association of Realtors®, predicts that residential sales will drop to such and such in the coming year, you know that things are likely going to be just fine. After all, how many times in the last five years have we been told that rising interest rates will bring home sales to a grinding halt? I'm still waiting. The story seems to be different in the commercial end, because commercial real estate depends more on the health of the economy as a whole than residential real estate appears to. Lereah said last week that the commercial market was responding to improvements in the overall economy. "New jobs are filling office and industrial space, and vacancies will generally decline in the commercial real estate market," he said. "A silver lining to the recent slide of the U.S. dollar on foreign currency markets is an expected boost to U.S. exports that could also stimulate foreign purchase of U.S. commercial property." Changing currency values have numerous effects, he said. "On one hand, the higher cost of foreign products will rein in some consumer spending. On the other, rising exports will help the economy to grow in 2005, which will create new jobs." Lereah projects the Gross Domestic Product to grow 4 percent next year, leading to the creation of 2.5 to three million new jobs. The growth in federal budget deficits is the primary factor in the dollar's decline, he said. "Even with the expected benefit for exports, high budget deficits do raise a yellow flag," Lereah said. "Long term, if the deficit becomes large enough, the government would compete with the private sector for available funds and that would cause interest rates to rise. Too much of a rate increase would be detrimental for the U.S. economy, but we do not see that occurring in the foreseeable future -- the dollar should improve, and right now we're in pretty good shape." The NAR forecast for four major commercial sectors is based on analysis of data in 57 metro areas tracked, including the office, retail, industrial and multifamily markets. The forecast was produced with data provided by Torto Wheaton Research and Real Capital Analytics. Net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, is performing exceptionally well. With a decline in sublet and unused space, net absorption will nearly triple to 55.9 million square feet this year in contrast with only 20.0 million in 2003. An additional 50.4 million square feet are expected to be absorbed in 2005, with 59.7 million in 2006. Office vacancy rates in the 57 markets tracked are likely to decline to 15.3 percent in 2005 and 14.1 percent in 2006 from 16.2 percent this year. Office rents for 2004 will be up about 1.0 percent, and then should rise 2.8 percent next year and another 3.3 percent in 2006. In the retail sector, net absorption in the 57 metro areas tracked is estimated at 27.5 million square feet in 2004, more than double the 11.8 million last year; 33.6 million square feet are forecast for 2005 with 27.0 million in 2006. The most popular retail properties for investors are centers anchored by a grocery store. The industrial market varies greatly around the country but is experiencing a level of net absorption not seen since 2000, much of it build-to-suit, forecast at 144.4 million square feet in 2004 in the 57 markets tracked, up greatly from only 16.5 million last year. Net absorption should be at 110.5 million square feet next year and 132.1 million in 2006. The apartment rental market -- multifamily housing -- should experience a net absorption of 243,400 units in the 57 markets tracked this year, up from 159,400 in 2003. Net absorption is projected at 226,700 in 2005 and 225,900 in 2006. The average vacancy rate should rise to 6.8 percent this year from 6.4 percent in 2003, and is projected to drop to 6.6 percent in 2005 and 6.2 percent in 2006. Average rent is forecast to rise 1.3 percent for 2004, 1.8 percent in 2005 and 2.6 percent in 2006. All in all, the components of commercial real estate look promising. | 
