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Commercial Real Estate Outlook - November 2010

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Commercial Real Estate Outlook - November 2010

Commercial Real Estate Outlook - November 2010

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Commercial Real Estate Outlook - November 2010 Commercial Real Estate Outlook - November 2010 Document Transcript

  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCHNOVEMBER 2010 Economic Activity Maintains Momentum in Third Quarter By George Ratiu, NAR Economist The third quarter economic activity International trade expanded during the maintained the moderate positive quarter, as well. The balance of trade momentum it has been building over the remained negative, however, as imports past year. Consumer spending continued to grew by 16.8 percent and exports by 6.3 surprise with its resiliency in the face of percent. The other major component of stubbornly high unemployment. But GDP—government spending—advancedMarket Fundamentals questions about the direction of the 4.0 percent, mostly at the federal level. economy remain, as evidenced by the 2010.Q3>2010.Q4 Federal Reserve’s second round ofOFFICE quantitative easing measures (QE2) as well as the condition of commercial real estate. Vacancy GDP (% Chg - Annual Rate) Net Absorption Economic Activity Completions Based on the Bureau of Economic Rent Growth Analysis’s second estimate, gross domestic product (GDP) rose 2.5 percent in the thirdINDUSTRIAL quarter. Mirroring the second quarter’s Vacancy patterns, all major components—except net exports—advanced. The gains were driven Net Absorption by double-digit growth in business investments, along with sustained Source: BLS Completions expenditures by consumers and Rent Growth government. Business spending increased 12.4 percent during the quarter. While (continued on page 2)RETAIL taking a slower pace compared with the first Vacancy half of the year, businesses continued to spend on equipment—software and Net Absorption transportation were up 15.2 percent and Completions 64.0 percent, respectively. Contrary to BEA’s first estimate, after eight consecutive Rent Growth quarters of declines, business spending onMULTIFAMILY commercial real estate declined 5.8 percent. Vacancy The major economic driver, consumer Commercial real estate markets are Net Absorption spending stayed the course, gaining 2.8 flattening out, with modestly improving percent during the third quarter. fundamentals expected in 2011. Rents are Completions Consumers increased their spending on expected to continue to decline, as Rent Growth both goods and services, particularly for vacancies remain elevated. Multifamily recreation and recreational goods, home performance has proven resilient and is furnishings, transportation and health care. expected to lead into 2011.
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCHNOVEMBER 2010(continued from page 1)Employment Meanwhile, the University of Michigan survey of consumer sentiment also declined during the thirdAfter a strong first half of 2010, employment trends took a quarter, to close at 68.2 in September. It has risendive during the third quarter. Businesses, while still slightly to 69.3 during November, but remains well belowspending, are doing so more targeted and not on jobs. the 100 value typical of economic expansions.While corporate profits are back up to their peak beforethe recession, companies are just sitting on cash and not Commercial Lendingactively pursuing expansion plans. The number of payrolljobs declined by 53,000 for the period. The decline was Commercial sales transactions are slowly rising.somewhat offset in October, when the economy added However, the commercial markets are starting to151,000 jobs. But, employment conditions remain mired experience a bifurcation along property values. Whilein uncertainty. The first-time unemployment insurance investment capital appears ready to deal at the high-endclaims have been stuck at around 450,000 per week. The of the market, the smaller size investments andfigure needs to fall below 400,000 per week to ensure a businesses are still finding little room to maneuver.meaningful, consistent job creation. In addition, thenumber of people drawing unemployment benefits stayed With fundamentals on an upward trend, larger propertiesabove 4.5 million. Not surprisingly, the unemployment in stronger markets are attracting investor interest. At therate has been fixed at 9.6 percent for three months. same time, smaller properties in slower markets continue to display signs of distress. 600 Payroll Employment (Monthly Chg, 000s) 400 Commercial Realtors cite lack of financing as the main obstacle to a broad market recovery. Commercial loan 200 originations are down 83 percent from peak, lending standards remain stringent and, faced with other 0 investment alternatives, banks remain wary of 2008-May 2009-May 2010-May 2008-Mar 2009-Mar 2010-Mar 2008-Jan 2009-Jan 2010-Jan 2008-Jul 2009-Jul 2010-Jul 2008-Nov 2009-Nov 2008-Sep 2009-Sep 2010-Sep -200 commercial transactions. The QE2 attempt to keep long- term rates lower, which may or may not be working, is -400 inconsequential to the market compared to the importance of returning lending standards to normal from -600 their overly stringent current rules. For the time being, buyers with cash are facing few, if any, competitors in -800 Source: BLS bidding for a building.-1000 OutlookGiven the tepid pace of recovery and the employmentpicture, consumers remained uncertain. In addition, the The third quarter survey mirrors a weak-yet-hopefulmidterm elections provided an added measure of volatility commercial real estate market. While the economyto consumers’ mood. The two main measures of grows, high unemployment continues to figureconsumer confidence and sentiment mirrored these prominently in the minds of both consumers andtrends. The consumer confidence index compiled by the businesses, driving spending decisions. With theConference Board—a measure that considers knowledge that the midterm elections brought changes inrespondents’ general feelings about the job market and Congress and major legislative issues are still pending,their finances—declined from a high of 62.7 in May to the fourth quarter will likely give a clearer indication of48.6 in September, the second lowest value for the year. what lies ahead, especially looking at 2011.More troubling, consumers’ expectations are also on thedecline, after a burst of optimism during the first half. 2
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCH NOVEMBER 2010Annual Growth 2010 I 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2009 2010 2011 2012Rates (%)Real GDP 3.7 1.7 2.0 1.8 2.1 2.1 1.8 2.4 3.1 3.1 -2.6 2.7 2.0 2.8NonfarmPayroll 0.2 2.2 -0.3 2.5 0.8 1.2 0.8 0.5 1.1 1.2 -4.3 -0.4 1.1 1.1EmploymentConsumer 1.5 -0.7 1.5 2.2 2.2 2.6 2.2 1.8 1.7 2.0 -0.3 1.6 1.9 1.9PricesRealDisposable 1.3 4.4 0.5 0.7 -0.6 1.1 1.1 1.5 3.2 2.7 0.6 1.1 0.8 2.4IncomeConsumer 52 58 51 52 53 54 55 58 61 61 45 53 55 63ConfidenceUnemploymen 9.7 9.7 9.6 9.8 9.8 9.7 9.6 9.5 9.4 9.3 9.3 9.7 9.7 9.3t (%)Interest Rates 2010 I 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2009 2010 2011 2012(%)Fed Funds 0.1 0.2 0.2 0.1 0.1 0.3 0.5 1.0 1.5 1.8 0.2 0.2 0.5 2.0Rate3-Month T-Bill 0.1 0.1 0.2 0.4 0.4 0.7 0.9 1.3 1.7 1.9 0.2 0.2 0.8 2.1RatePrime Rate 3.3 3.3 3.3 3.1 3.2 3.2 3.6 4.0 4.6 5.3 3.3 3.2 3.5 5.0Corporate Aaa 5.3 5.0 4.6 4.2 4.3 4.6 4.7 4.9 5.1 5.4 5.3 4.8 4.6 5.4Bond Yield10-YearGovernment 3.7 3.5 2.8 2.7 2.9 3.2 3.4 3.6 3.9 4.1 3.3 3.2 3.3 4.2Bond30-YearGovernment 4.6 4.4 3.9 3.6 3.8 4.1 4.3 4.5 4.7 4.9 4.1 4.1 4.2 4.9BondSource: National Association of REALTORS® 3
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCH NOVEMBER 2010OFFICE 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011Vacancy Rate 16.7% 16.6% 16.7% 16.8% 16.8% 16.6% 16.4% 15.7% 16.7% 16.7%Net Absorption(000 sq. ft.) 3,042 6,705 -2,353 1,128 2,357 5,723 7,155 -38,106 -3,705 16,363Completions (000sq. ft.) 5,611 3,585 2,824 4,952 1,771 180 396 52,787 21,708 7,299Inventory (000,000sq. ft.) 3,574 3,575 3,576 3,581 3,583 3,583 3,583 3,572 3,576 3,583Rent Growth -0.5% -0.3% -0.4% -0.4% -0.4% -0.4% -0.4% -12.7% -1.8% -1.6%INDUSTRIAL 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011Vacancy Rate 14.1% 14.0% 13.9% 13.8% 13.6% 13.4% 13.2% 13.2% 14.1% 13.5%Net Absorption(000 sq. ft.) -5,186 10,459 14,382 23,937 30,851 36,562 42,613 -258,071 -25,074 133,963Completions (000sq. ft.) 6,551 2,639 5,702 3,087 10,676 11,604 14,717 70,082 27,192 40,084Inventory (000,000sq. ft.) 13,167 13,169 13,174 13,177 13,188 13,199 13,214 13,110 13,174 13,214Rent Growth -1.3% -0.4% -1.2% -0.9% -0.9% -0.9% -0.7% -10.9% -4.0% -3.4%RETAIL 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011Vacancy Rate 13.1% 13.1% 13.1% 13.1% 13.1% 13.0% 13.0% 12.0% 13.1% 13.1%Net Absorption(000 sq. ft.) -637 994 179 595 1,045 1,484 1,907 -18,325 -481 5,031Completions (000sq. ft.) 762 743 1,252 1,323 1,019 319 1,734 12,034 4,024 4,395Inventory (000,000sq. ft.) 1,644 1,645 1,646 1,647 1,648 1,649 1,651 1,659 1,646 1,651Rent Growth -1.0% -1.1% -0.6% -0.3% -0.1% 0.0% 0.1% -4.0% -3.4% -0.3%MULTI-FAMILY 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011Vacancy Rate 6.0% 5.8% 6.4% 6.2% 5.8% 5.3% 5.8% 7.4% 6.4% 5.8%Net Absorption(Units) 90,474 39,651 -72,149 46,563 65,728 82,251 -47,590 105,458 85,173 146,952Completions (Units) 15,193 12,339 11,012 11,580 12,501 14,647 17,076 177,589 59,461 55,804Inventory(Units in millions) 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.4 14.5 14.5Rent Growth -0.1% 0.4% 0.2% 0.3% 0.3% 0.4% 0.4% -3.6% 0.2% 1.4%Source: National Association of REALTORS®/CBRE-Econometric Advisors 4
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCH NOVEMBER 2010 Office Industrial Retail MultifamilyAlbuquerque, NM 18.4% 12.8% 12.6% 6.0%Atlanta, GA 21.2% 18.6% 16.5% 9.6%Austin, TX 17.6% 15.8% 12.3% 6.5%Baltimore, MD 15.7% 15.4% 10.1% 5.4%Boston, MA 13.2% 17.6% 10.1% 4.2%Charlotte, NC 19.0% 15.9% 15.1% 7.4%Chicago, IL 16.3% 14.9% 13.9% 6.0%Cincinnati, OH 18.3% 12.9% 18.6% 7.9%Cleveland, OH 18.3% 12.1% 17.4% 7.3%Columbus, OH 17.7% 15.7% 17.3% 6.6%Dallas, TX 22.5% 15.8% 16.9% 8.5%Denver, CO 16.8% 12.4% 13.0% 5.8%Detroit, MI 25.7% 20.6% 17.7% 8.5%Fort Lauderdale, FL 17.0% 12.5% 12.4% 5.1%Fort Worth, TX 15.1% 15.1% 17.0% 9.2%Hartford, CT 19.5% 17.5%Honolulu, HI 9.1% 7.8% 6.9%Houston, TX 17.2% 10.7% 14.0% 10.3%Indianapolis, IN 16.6% 12.6% 18.0% 9.0%Jacksonville, FL 22.0% 15.2% 15.0% 10.1%Kansas City, MO 16.8% 10.3% 18.5% 7.8%Las Vegas, NV 24.9% 13.6% 17.6% 8.5%Long Island, NY 17.6% 11.0% 8.0%Los Angeles, CA 11.6% 8.0% 8.6% 5.7%Miami, FL 14.4% 12.4% 8.3% 4.0%Milwaukee, WI 19.1% 14.3%Minneapolis, MN 20.2% 12.2% 13.9% 4.8%Nashville, TN 14.0% 15.5% 12.4% 5.8%New York, NY 8.8% 11.7% 8.6% 5.6%Newark, NJ 15.7% 13.4% 4.9%Oakland, CA 17.8% 14.2% 8.6% 4.6%Orange County, CA 19.8% 11.1% 7.8% 5.0%Orlando, FL 17.7% 15.9% 14.6% 7.3% 5
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCH NOVEMBER 2010 Office Industrial Retail MultifamilyPhiladelphia, PA 15.2% 13.5% 13.1% 5.2%Phoenix, AZ 25.9% 18.2% 16.6% 8.9%Pittsburgh, PA 11.4% 5.4%Portland, OR 16.5% 10.7% 12.1% 4.2%Raleigh, NC 14.9% 5.6%Riverside, CA 22.4% 15.4% 14.5% 6.2%Sacramento, CA 21.9% 18.4% 15.6% 7.4%Salt Lake City, UT 16.6% 9.2% 15.8% 5.6%San Diego, CA 18.9% 14.9% 10.5% 4.6%San Francisco, CA 14.1% 10.6% 7.0% 4.9%San Jose, CA 24.1% 14.6% 8.0% 3.4%Seattle, WA 16.8% 11.2% 12.2% 4.9%St. Louis, MO 15.9% 14.0% 14.5% 8.3%Stamford, CT 12.8% 19.9%Tampa, FL 23.2% 13.4% 12.7% 7.8%Tucson, AZ 16.9% 12.8% 16.8% 8.1%Ventura, CA 18.4% 12.3% 10.5%Washington, DC 12.8% 15.2% 8.9% 4.6%West Palm Beach, FL 21.1% 14.3% 13.3% 5.3%Wilmington, DE 18.5% 13.7% 14.5%National Averages* 16.7% 13.9% 13.1% 6.4%*Not all markets are represented in chart above.Source: NAR / CBRE-EA NATIONAL 3.86% OFFICE 3.12% INDUSTRIAL 2.80% RETAIL 3.39% APARTMENT 6.04% Source: National Council of Real Estate Investment Fiduciaries 6
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCHNOVEMBER 2010October 2010 – More than 400 SIOR market experts across The vacancy rates are improving in all regions, howeverthe country weighed in on industrial and office market there is still ample sublease space available andconditions for the Third Quarter 2010 SIOR Commercial Real concessions continue to make it a tenant’s market.Estate Index. The responses, compiled by the SOCIETY OF Practitioners from the Midwest are experiencing higherINDUSTRIAL AND OFFICE REALTORS (SIOR) in vacancy rates than a year ago, and the South is postingassociation with the NATIONAL ASSOCIATION OF better results both in vacancy rates and leasing activity.REALTORS (NAR), present an accurate depiction of thecurrent industry as fall approaches. Development activity continues to be at a standstill across the country, with the West, Midwest and South close to anThe SIOR Index gained 1.6 points during third quarter 2010. actual value of zero. Although construction is non existent,The SIOR Index, which measures 10 variables pertinent to SIORs say there are plenty of deals available for sites.the performance of U.S. industrial and office markets (seeMethodology), rose again in the third quarter 2010, Office Marketadvancing to reach 42.6—100 points signifies a balanced The market improvements are visible more in lower levels ofmarket. Equilibrium has not been experienced (100 points) tenant concessions in office markets, and leasing activitysince the third quarter of 2007. and rental rates for the office market are slightly stronger than the industrial market. However, the office marketFor the past three quarters the market has been on a continues to have more sublease space and higher vacancygradual but steady incline. The Index has now reached the rates, and prospects for the next three months are lower forlevel it was at in the beginning of 2009. Both the industrial office practitioners.and office sectors realized gains once again. When askedabout the outlook of the next three months, 59 percent of Industrial MarketSIORs expected an improvement in the market, an increase The industrial marketplace has leasing activity belowof 2 percent from last quarter. historical levels, rental rates in a steeper decline, tenant concessions from landlords at higher levels, sales pricesOverall, vacancy rates are continuing to slowly improve, falling, and close to zero construction taking place. Thehowever rents still remain low and subleasing space is still national economy is clearly having a negative impact on thehigh in this tenant market. Fewer respondents feel that local markets, but more so for industrial practitioners.asking rents are below where they were a year ago, andfewer SIORs feel that vacancy rates are higher than a year Regional Breakdownago. The West (36.8 points) improved by 1.9 points, however it continues to suffer from weak local economic conditions,Development remains stagnant in all regions and excess sublease space, a deep level of concessions, andinvestments are still low, but on the positive side, falling prices. SIOR respondents in the West scored thedevelopment acquisitions and leasing activity are beginning lowest outlook of all regions for the next quarter.to grow in many parts of the country. Developmentacquisitions are improving, as 96 percent of SIOR The South (47 points) saw the greatest improvement, risingrespondents feel it is a buyer’s market as opposed to 97 by three points, posting stronger leasing activity and betterpercent last quarter. vacancy rates. Local economies in the South are continuing to fare comparatively better than other regions, althoughAlthough SIOR members continue to report that the national development is still at a standstill.economic recession is significantly impacting local industrialand office markets, several market indicators show signs of The Northeast (45.7 points), gained less than a point sinceleveling-off, and others, especially the Mid-West, are even last quarter, the smallest gain out of all regions. It postedposting improvements. Fewer respondents today feel that better vacancy rates, sublease space that is closing in onthe national economy is having a negative impact on their normal, and more stable sales prices than other regions.local market. The Mid-West (42 points) improved by 1.3 points. Development and activity still remains near zero, and it 7 continues to be a buyer’s market. However, the Midwest is close to normal conditions for subleasing space.
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCHNOVEMBER 2010 Office Sales Volume OFFICE $10 Region Average Cap Rate Average Price ($/Sq. Ft.) Mid-AtlanticBillions 5.7% $409 Midwest 6.8% $101 $5 Northeast 5.8% $361 Southeast 6.8% $107 $0 Southwest 8.0% $144 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 West 7.8% $207 Industrial Sales Volume INDUSTRIAL $6 Region Average Cap Rate Average Price ($/Sq. Ft.)Billions Mid-Atlantic 9.5% $60 $4 Midwest 7.2% $51 $2 Northeast - $72 $0 Southeast 8.8% $43 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Southwest 8.5% $59 West 8.4% $76 Retail Sales Volume RETAIL $10 Region Average Cap Rate Average Price ($/Sq. Ft.)Billions Mid-Atlantic 8.0% $215 $5 Midwest 8.3% $68 Northeast 6.2% $569 $0 Southeast 8.4% $129 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Southwest 7.3% $132 West 7.6% $238 Multifamily Sales Volume $10 MULTI-FAMILYBillions Region Average Cap Rate Average Price ($/Unit) Mid-Atlantic 8.1% $124,642 $5 Midwest 6.2% $36,931 Northeast 5.6% $171,048 $0 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Southeast 7.3% $90,361 Southwest 7.3% $91,757 West 5.9% $195,878 Note: Data based on sales closed in 2010.Q4 through October Source: Real Capital Analytics 8
  • NATIONAL ASSOCIATION of COMMERCIAL REAL ESTATE OUTLOOK REALTORS® RESEARCHNOVEMBER 2010 THE NATIONAL ASSOCIATION OF REALTORS®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.. The Research Division of the National Association of REALTORS® monitors and analyzes monthly and quarterly economic indicators, including retail sales, industrial production, producer price index, gross domestic product and employment data that clearly impact commercial markets over time. In addition, the Research Division provides several products covering commercial real estate: • Commercial Member Profile • Commercial Real Estate Quarterly Market Survey For more information, please visit us at www.realtors.org/research. If you have questions or comments regarding this report or any other commercial real estate research, please contact George Ratiu, NAR Economist, at gratiu@realtors.org. Although the information presented in this report has been obtained from reliable sources, NAR does not guarantee its accuracy, and such information may be incomplete. This report is for information purposes only. All opinions, assumptions and estimates constitute NAR’s judgment as of the date of this publication and are subject to change and evolving events. Actual results may vary from forecast results. NATIONAL ASSOCIATION OF REALTORS® Research Division 500 New Jersey Avenue, NW Washington, DC 20001 Copyright© 2010 NATIONAL ASSOCIATION OF REALTORS®. Reproduction, reprinting or retransmission in any form is prohibited without written permission. For questions regarding this matter please e-mail eresearch@realtors.org. 9