Commercial Real Estate Outlook - November 2010

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Commercial Real Estate Outlook - November 2010

  1. 1. COMMERCIAL REAL ESTATE OUTLOOK NOVEMBER 2010 By George Ratiu, NAR Economist The third quarter economic activity maintained the moderate positive momentum it has been building over the past year. Consumer spending continued to surprise with its resiliency in the face of stubbornly high unemployment. But questions about the direction of the economy remain, as evidenced by the Federal Reserve’s second round of quantitative easing measures (QE2) as well as the condition of commercial real estate. Economic Activity Based on the Bureau of Economic Analysis’s second estimate, gross domestic product (GDP) rose 2.5 percent in the third quarter. Mirroring the second quarter’s patterns, all major components—except net exports—advanced. The gains were driven by double-digit growth in business investments, along with sustained expenditures by consumers and government. Business spending increased 12.4 percent during the quarter. While taking a slower pace compared with the first half of the year, businesses continued to spend on equipment—software and transportation were up 15.2 percent and 64.0 percent, respectively. Contrary to BEA’s first estimate, after eight consecutive quarters of declines, business spending on commercial real estate declined 5.8 percent. The major economic driver, consumer spending stayed the course, gaining 2.8 percent during the third quarter. Consumers increased their spending on both goods and services, particularly for recreation and recreational goods, home furnishings, transportation and health care. International trade expanded during the quarter, as well. The balance of trade remained negative, however, as imports grew by 16.8 percent and exports by 6.3 percent. The other major component of GDP—government spending—advanced 4.0 percent, mostly at the federal level. (continued on page 2) Commercial real estate markets are flattening out, with modestly improving fundamentals expected in 2011. Rents are expected to continue to decline, as vacancies remain elevated. Multifamily performance has proven resilient and is expected to lead into 2011. Economic Activity Maintains Momentum in Third Quarter Market Fundamentals 2010.Q3>2010.Q4 OFFICE Vacancy Net Absorption Completions Rent Growth INDUSTRIAL Vacancy Net Absorption Completions Rent Growth RETAIL Vacancy Net Absorption Completions Rent Growth MULTIFAMILY Vacancy Net Absorption Completions Rent Growth NATIONAL ASSOCIATION of REALTORS® RESEARCH GDP (% Chg - Annual Rate) Source: BLS
  2. 2. COMMERCIAL REAL ESTATE OUTLOOK 2 (continued from page 1) Employment After a strong first half of 2010, employment trends took a dive during the third quarter. Businesses, while still spending, are doing so more targeted and not on jobs. While corporate profits are back up to their peak before the recession, companies are just sitting on cash and not actively pursuing expansion plans. The number of payroll jobs declined by 53,000 for the period. The decline was somewhat offset in October, when the economy added 151,000 jobs. But, employment conditions remain mired in uncertainty. The first-time unemployment insurance claims have been stuck at around 450,000 per week. The figure needs to fall below 400,000 per week to ensure a meaningful, consistent job creation. In addition, the number of people drawing unemployment benefits stayed above 4.5 million. Not surprisingly, the unemployment rate has been fixed at 9.6 percent for three months. Given the tepid pace of recovery and the employment picture, consumers remained uncertain. In addition, the midterm elections provided an added measure of volatility to consumers’ mood. The two main measures of consumer confidence and sentiment mirrored these trends. The consumer confidence index compiled by the Conference Board—a measure that considers respondents’ general feelings about the job market and their finances—declined from a high of 62.7 in May to 48.6 in September, the second lowest value for the year. More troubling, consumers’ expectations are also on the decline, after a burst of optimism during the first half. Meanwhile, the University of Michigan survey of consumer sentiment also declined during the third quarter, to close at 68.2 in September. It has risen slightly to 69.3 during November, but remains well below the 100 value typical of economic expansions. Commercial Lending Commercial sales transactions are slowly rising. However, the commercial markets are starting to experience a bifurcation along property values. While investment capital appears ready to deal at the high-end of the market, the smaller size investments and businesses are still finding little room to maneuver. With fundamentals on an upward trend, larger properties in stronger markets are attracting investor interest. At the same time, smaller properties in slower markets continue to display signs of distress. Commercial Realtors cite lack of financing as the main obstacle to a broad market recovery. Commercial loan originations are down 83 percent from peak, lending standards remain stringent and, faced with other investment alternatives, banks remain wary of commercial transactions. The QE2 attempt to keep long- term rates lower, which may or may not be working, is inconsequential to the market compared to the importance of returning lending standards to normal from their overly stringent current rules. For the time being, buyers with cash are facing few, if any, competitors in bidding for a building. Outlook The third quarter survey mirrors a weak-yet-hopeful commercial real estate market. While the economy grows, high unemployment continues to figure prominently in the minds of both consumers and businesses, driving spending decisions. With the knowledge that the midterm elections brought changes in Congress and major legislative issues are still pending, the fourth quarter will likely give a clearer indication of what lies ahead, especially looking at 2011. NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010 -1000 -800 -600 -400 -200 0 200 400 600 2008-Jan 2008-Mar 2008-May 2008-Jul 2008-Sep 2008-Nov 2009-Jan 2009-Mar 2009-May 2009-Jul 2009-Sep 2009-Nov 2010-Jan 2010-Mar 2010-May 2010-Jul 2010-Sep Payroll Employment (Monthly Chg, '000s) Source: BLS
  3. 3. COMMERCIAL REAL ESTATE OUTLOOK 3 Annual Growth 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 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 2.8 Nonfarm Payroll Employment 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 1.1 Consumer Prices 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 1.9 Real Disposable Income 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 2.4 Consumer Confidence 52 58 51 52 53 54 55 58 61 61 45 53 55 63 Unemploymen t (%) 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 9.3 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 Rate 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 2.0 3-Month T-Bill Rate 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 2.1 Prime 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 5.0 Corporate Aaa Bond Yield 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 5.4 10-Year Government Bond 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 4.2 30-Year Government Bond 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 4.9 Source: National Association of REALTORS® NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010
  4. 4. COMMERCIAL REAL ESTATE OUTLOOK 4 OFFICE 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011 Vacancy 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 16,363 Completions ('000 sq. ft.) 5,611 3,585 2,824 4,952 1,771 180 396 52,787 21,708 7,299 Inventory ('000,000 sq. ft.) 3,574 3,575 3,576 3,581 3,583 3,583 3,583 3,572 3,576 3,583 Rent 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 2011 Vacancy 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 -25,074 133,963 Completions ('000 sq. ft.) 6,551 2,639 5,702 3,087 10,676 11,604 14,717 70,082 27,192 40,084 Inventory ('000,000 sq. ft.) 13,167 13,169 13,174 13,177 13,188 13,199 13,214 13,110 13,174 13,214 Rent 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 2011 Vacancy 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 5,031 Completions ('000 sq. ft.) 762 743 1,252 1,323 1,019 319 1,734 12,034 4,024 4,395 Inventory ('000,000 sq. ft.) 1,644 1,645 1,646 1,647 1,648 1,649 1,651 1,659 1,646 1,651 Rent 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 2011 Vacancy 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 85,173 146,952 Completions (Units) 15,193 12,339 11,012 11,580 12,501 14,647 17,076 177,589 59,461 55,804 Inventory (Units in millions) 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.4 14.5 14.5 Rent 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 NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010
  5. 5. COMMERCIAL REAL ESTATE OUTLOOK 5 Office Industrial Retail Multifamily Albuquerque, 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% NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010
  6. 6. COMMERCIAL REAL ESTATE OUTLOOK 6 Office Industrial Retail Multifamily Philadelphia, 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 NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010
  7. 7. COMMERCIAL REAL ESTATE OUTLOOK 7 October 2010 – More than 400 SIOR market experts across the country weighed in on industrial and office market conditions for the Third Quarter 2010 SIOR Commercial Real Estate Index. The responses, compiled by the SOCIETY OF INDUSTRIAL AND OFFICE REALTORS (SIOR) in association with the NATIONAL ASSOCIATION OF REALTORS (NAR), present an accurate depiction of the current industry as fall approaches. The SIOR Index gained 1.6 points during third quarter 2010. The SIOR Index, which measures 10 variables pertinent to the performance of U.S. industrial and office markets (see Methodology), rose again in the third quarter 2010, advancing to reach 42.6—100 points signifies a balanced market. Equilibrium has not been experienced (100 points) since the third quarter of 2007. For the past three quarters the market has been on a gradual but steady incline. The Index has now reached the level it was at in the beginning of 2009. Both the industrial and office sectors realized gains once again. When asked about the outlook of the next three months, 59 percent of SIORs expected an improvement in the market, an increase of 2 percent from last quarter. Overall, vacancy rates are continuing to slowly improve, however rents still remain low and subleasing space is still high in this tenant market. Fewer respondents feel that asking rents are below where they were a year ago, and fewer SIORs feel that vacancy rates are higher than a year ago. Development remains stagnant in all regions and investments are still low, but on the positive side, development acquisitions and leasing activity are beginning to grow in many parts of the country. Development acquisitions are improving, as 96 percent of SIOR respondents feel it is a buyer’s market as opposed to 97 percent last quarter. Although SIOR members continue to report that the national economic recession is significantly impacting local industrial and office markets, several market indicators show signs of leveling-off, and others, especially the Mid-West, are even posting improvements. Fewer respondents today feel that the national economy is having a negative impact on their local market. The vacancy rates are improving in all regions, however there is still ample sublease space available and concessions continue to make it a tenant’s market. Practitioners from the Midwest are experiencing higher vacancy rates than a year ago, and the South is posting better results both in vacancy rates and leasing activity. Development activity continues to be at a standstill across the country, with the West, Midwest and South close to an actual value of zero. Although construction is non existent, SIORs say there are plenty of deals available for sites. Office Market The market improvements are visible more in lower levels of tenant concessions in office markets, and leasing activity and rental rates for the office market are slightly stronger than the industrial market. However, the office market continues to have more sublease space and higher vacancy rates, and prospects for the next three months are lower for office practitioners. Industrial Market The industrial marketplace has leasing activity below historical levels, rental rates in a steeper decline, tenant concessions from landlords at higher levels, sales prices falling, and close to zero construction taking place. The national economy is clearly having a negative impact on the local markets, but more so for industrial practitioners. Regional Breakdown The West (36.8 points) improved by 1.9 points, however it continues to suffer from weak local economic conditions, excess sublease space, a deep level of concessions, and falling prices. SIOR respondents in the West scored the lowest outlook of all regions for the next quarter. The South (47 points) saw the greatest improvement, rising by three points, posting stronger leasing activity and better vacancy rates. Local economies in the South are continuing to fare comparatively better than other regions, although development is still at a standstill. The Northeast (45.7 points), gained less than a point since last quarter, the smallest gain out of all regions. It posted better vacancy rates, sublease space that is closing in on normal, and more stable sales prices than other regions. The Mid-West (42 points) improved by 1.3 points. Development and activity still remains near zero, and it continues to be a buyer’s market. However, the Midwest is close to normal conditions for subleasing space. NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010
  8. 8. COMMERCIAL REAL ESTATE OUTLOOK 8 OFFICE Region Average Cap Rate Average Price ($/Sq. Ft.) Mid-Atlantic 5.7% $409 Midwest 6.8% $101 Northeast 5.8% $361 Southeast 6.8% $107 Southwest 8.0% $144 West 7.8% $207 INDUSTRIAL Region Average Cap Rate Average Price ($/Sq. Ft.) Mid-Atlantic 9.5% $60 Midwest 7.2% $51 Northeast - $72 Southeast 8.8% $43 Southwest 8.5% $59 West 8.4% $76 RETAIL Region Average Cap Rate Average Price ($/Sq. Ft.) Mid-Atlantic 8.0% $215 Midwest 8.3% $68 Northeast 6.2% $569 Southeast 8.4% $129 Southwest 7.3% $132 West 7.6% $238 MULTI-FAMILY Region Average Cap Rate Average Price ($/Unit) Mid-Atlantic 8.1% $124,642 Midwest 6.2% $36,931 Northeast 5.6% $171,048 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 NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010 $0 $5 $10 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Billions Office Sales Volume $0 $2 $4 $6 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Billions Industrial Sales Volume $0 $5 $10 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Billions Retail Sales Volume $0 $5 $10 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 Billions Multifamily Sales Volume
  9. 9. COMMERCIAL REAL ESTATE OUTLOOK 9 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. NATIONAL ASSOCIATION of REALTORS® RESEARCH NOVEMBER 2010

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