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(July 2, 2001) – Commercial real estate market activity is slowing but remains positive, according to THE NATIONAL ASSOCIATION OF REALTORS COMMERCIAL REAL ESTATE QUARTERLY. The report covers a wide range of statistics and market rankings for the five major commercial sectors during the first quarter of 2001*, including the office, warehouse, retail, lodging and multifamily markets, as well as market sector forecasts for the year.

Dr. David Lereah, NAR's chief economist, said all of the commercial sectors would remain positive for the year. "The multifamily market for rental apartments is strongest, while the lodging market's growth is expected to be slightly less than the general rate of inflation," he said. "We're seeing a cooling in most of the commercial markets that has been tracking the slowdown in the U.S. economy. At the same time, there's a general balance in commercial real estate, which means more positive growth can be expected as the economy improves later this year," he said.

For the office market, NAR reported office employment dropped by 67,000 jobs during the first quarter in the 54 major markets tracked, mostly in temporary jobs. There was job growth in other sectors, but not enough to offset the loss of temporary jobs; this triggered a massive increase in sublease space. As a result, only 8 million square feet of office space was absorbed. Combined with a high volume of new supply, the vacancy rate rose to 10.4 percent in the first quarter – half of a percentage point higher than the fourth quarter of 2000. Inflation-adjusted office rent rose only 0.9 percent from the fourth quarter of 2000, but remained 7.5 percent above the first quarter of last year. Construction slowed to 48 million square feet in the first quarter, down from 65 million square feet under construction during the fourth quarter.

Given the economic slowdown, the association expects modest office demand growth in 2001, with net absorption expected at 46 million square feet. With 150 million square feet of new space coming on-line this year, vacancy rates are expected to rise to 11.6 percent by the end of the year, compared with a near record low of 9.9 percent at the end of 2000. Inflation-adjusted rents will grow at a more sustainable pace of 2.6 percent by year-end. Based on rent growth, the hottest office markets expected this year are Miami; San Diego; Palm Beach Co., Fla.; Long Island, N.Y.; and San Jose.

In the warehouse market, manufacturer inventories remain above desired levels and demand for warehouse space still managed to grow in the first quarter. NAR reported net absorption in the 54 markets tracked at 27 million square feet during the first quarter, down from 38 million square feet absorbed in the fourth quarter of 2000. Completions of new warehouse space dropped 10 percent from the fourth quarter to 36 million square feet in the first quarter. This raised the space availability rate 0.1 percentage point in the first quarter to 7.3 percent, which was unchanged from a year ago. On average, rents increased an inflation-adjusted 3.5 percent from a year ago. Construction starts of new space dropped to 34 million square feet in the first quarter from 44 million square feet in the fourth quarter.

The association projects the demand for warehouse space to level out in the third quarter and rise in the fourth quarter as manufacturers align their capacity with demand. Overall, net absorption should drop from 157 million square feet in 2000 to a total of 86 million square feet this year. The national availability rate should rise 0.7 percentage point this year to 7.9 percent. Warehouse rents, adjusted for inflation, are projected to rise 1.5 percent in 2001. Based on rent growth, the hottest warehouse markets are expected to be in Orange Country, Calif.; Los Angeles; San Jose; Riverside, Calif.; and San Francisco.

In the retail market, NAR reports demand for retail space in the 54 markets tracked rose 2.7 percent, with a net absorption of 16 million square feet in the first quarter, the lowest level in nearly six years. At the same time, net new space completions totaled 32 million square feet. The national vacancy rate slipped to 9.2 percent in the first quarter, down from 9.4 percent in the first quarter of last year. Rents rose at an inflation-adjusted 2.3 percent in the first quarter from the same period in 2000. Construction starts were at 42 million square feet in the first quarter, up from 40 million square feet a year ago.

The association projects that net absorption in the retail sector will slow through the fourth quarter, with total absorption this year at 43 million square feet. The vacancy rate in the 54 markets tracked is expected to rise to 10.3 percent by the end of the year. Retail rents are expected to rise an inflation-adjusted 1.7 percent in 2001. Based on rent growth, the hottest retail markets are expected to be in Denver; East Bay, Calif.; San Jose; Kansas City; and Los Angeles.

In the lodging market, reduced business travel slowed the demand for hotel rooms in the 54 markets tracked. The association reports demand increased 2.6 percent during the first quarter, about half of the 5.0 percent pace in the fourth quarter. The room occupancy rate slipped to 59.1 percent in the first quarter from 59.3 percent a year ago. At the same time, average daily room rates rose 3.7 percent. Revenue per available room grew by 3.4 percent in the first quarter. Construction in the 54 markets tracked stood at 10.6 million square feet in the first quarter, unchanged from the fourth quarter.

NAR expects continued weakness in the lodging market, but a general economic recovery in the second half of the year should help to bolster the sector. Lodging demand increases are expected to trail supply growth. As a result, hotel occupancy and room rates should slow through the third quarter before stabilizing in the fourth quarter. Revenue per available room is expected to grow at a slightly slower pace than the rate of inflation through the remainder of the year. Based on revenue per available room, the hottest lodging markets this year are expected to be in Riverside, Calif.; Los Angeles; San Francisco; Atlanta; and New York.

In the multifamily sector, the association reports strong activity with a net absorption of nearly 43,300 units in the first quarter. At the same time, completions of new rental units were nearly 53,100 units. While the absorption rate was high, the faster pace of new units coming on-line caused the vacancy rate to edge up 0.1 percentage points to 5.1 percent in the first quarter in the 54 markets tracked. With continued tight occupancy rates, inflation-adjusted rents rose 4.6 percent in the first quarter. Construction starts of new apartments were just under 57,300 units in the first quarter, down 13.0 percent from the previous quarter and year-ago level.

NAR projects construction of nearly 205,000 rental units in the 54 markets tracked during 2001. This should raise the total apartment stock in those markets by 1.7 percent this year, modestly surpassing the absorption rate of 1.3 percent. The vacancy rate is expected to rise modestly to 5.3 percent by the end of the year. Inflation-adjusted rent is projected to rise 3.0 percent in 2001. Based on rent growth, the hottest multifamily markets are expected to be in San Jose, Austin, Minneapolis, San Diego and Northern New Jersey.

NAR will release the second quarter report on September 27. A third quarter report and forecast for 2002 will be released at NAR?s Annual Conference in Chicago on Nov. 2.

The National Association of Realtors, "The Voice for Real Estate," is America's largest trade association, representing more than 760,000 members involved in all aspects of the residential and commercial real estate industries.

Walter Molony 202.383.1177

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