Despite slow economic growth, the commercial real estate market has fared better than expected, shared Ryan Severino, CFA and Senior Economist, Reis Inc., during RMA’s December 13th audioconference. Although skepticism lingers regarding CRE, Mr. Severino contends that now is the time to get in on deals that look attractive, before the market becomes saturated. Lending through the cycle works.
Supporting his recommendations, Mr. Severino provided a summary of third quarter trends in fundamentals for national apartment, office, retail, and industrial sectors.
Although third quarter GDP growth of 2% eased fears of a double-dip recession, it’s not enough to generate meaningful job growth. Expectations of slow growth are realistic: no evidence of impending stagflation, as inflation has also moderated somewhat in response to flagging aggregate demand. With realistic scenarios for job creation, we can expect the unemployment rate to remain stubbornly high. Recovery of all jobs lost from the start of the financial crisis in 2008 is not estimated to occur until late 2014, early 2015. The next few years will be generally slow and tough.
Vacancies in the national apartment market continued to tighten, but absorption slowed relative to Q1 and Q2. Rent growth has been positive for seven straight quarters, but has yet to accelerate significantly. Limited supply growth throughout 2011 will support tightening vacancies and rent growth for the remainder of the year.
The national office market showed declining vacancies from 17.6% in late 2010 to 17.4% in the third quarter. Rent growth has been paltry, but fairly consistent over the past four quarters. Absorption remains positive, and even suburban office markets are showing signs of a nascent recovery. There has been a resurgence of companies moving back to U.S. cities as more urban areas have been cracking down on crime.
The national retail market has seen a modest rise in vacancies to 11.1%, a daunting reminder of the distress this sector has experienced since 2008. However, the pace of deterioration has been slowing and we’re starting to see the first glimmers of hope for recovery.
In the industrial sector, Flex/R&D vacancies declined to 15.4% in the third quarter, down from a high of 15.8% one year ago. Third quarter dip in rents were driven by a faster decline in asking rents for Flex/R&D buildings. Warehouse/distribution vacancies are at 13.4% in the third quarter, after peaking at 14.2% in the third quarter of 2010. Third quarter drop in rents for warehouse/distribution facilities are characterized more by increased concessions, vis-à-vis declines in asking rents. Investors are paying significant premiums on trophy properties creating a disconnect between retail fundamentals and pricing.
National transaction activity declined slightly from Q3 2010. The long-term view is that activity will improve alongside the economy.
In summary, the recovery is progressing at different rates for various sectors, despite slow economic growth. The apartment sector is still doing well, office vacancies are declining slightly, and retail vacancies moored at 20-year highs.
Fears of a second recession have receded somewhat, but all eyes are still on the European financial crisis and on some aspects of the domestic economy.
Vacancy forecasts remain largely unchanged since early 2010. Expectations ratcheted downwards, however, for the most bullish rent growth forecasts.
Please join us for the next offering in the Risk Management Audioconference Series – The Boundaries Between Credit and Operational Risk – on January 10, 2012 at 1pm ET.