|Commerical Real Estate Markets Stabilizing, According To NAR
WASHINGTON (April 30, 2001) -- Commercial market sectors slowed during the last three months of 2000, but a general improvement is expected during the second half of this year, 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 fourth quarter of 2000*, including the office, warehouse, retail, lodging and multifamily markets, as well as market sector forecasts for 2001.
Dr. David Lereah, NAR's chief economist, said a relative weakness in fourth quarter commercial markets should stabilize during the first half of 2001, as most markets adjust to a slower economic environment. "However, the expected economic rebound in the second half of this year should bode well for all commercial real estate markets. Vacancy rates should remain generally low, while rent increases will be modest compared to the overall rate of inflation," he said. "The double-digit rent hikes we observed in a number of major markets will not be repeated in 2001, given generally weaker economic conditions," he added.
For the office market, NAR reported that the slowing economy and dot-com failures had a negligible impact in the 54 major markets tracked in the fourth quarter, boosting inventory levels 2.9 percent. The vacancy rate was 9.9 percent for all of 2000, down from 10.3 percent in 1999. Inflation-adjusted office rent rose an average 7.0 percent last year. Construction climbed to 59 million square feet in the fourth quarter, up 7.0 percent from 1999.
The association expects positive but moderating office demand growth in 2001. However, new space coming on line will consistently outpace demand, and vacancy rates are expected to rise to 10.8 percent this year. Inflation-adjusted rents will grow at a more sustainable pace of 3.8 percent in 2001. Based on rent growth, the hottest office markets expected this year are Boston, Austin, San Jose, San Diego and Orange County, Calif.
In the warehouse market, NAR reported inventory growth slowed as a result of manufacturing weakness, which subtracted 0.62 percentage points from overall gross domestic product (GDP) growth in the fourth quarter. Net absorption in the 54 markets tracked declined to 30 million square feet during the fourth quarter, but on an annualized basis a total of 135 million square feet was absorbed, up 3.0 percent from 1999. Meanwhile, completions of warehouse space dropped 5.6 percent from the third quarter to 34 million square feet. This raised inventory 2.9 percent to a total of 4.9 million square feet in 2000, while the space availability rate was 7.3 percent last year, down 0.1 percent from 1999. Construction totaled 191 million square feet in 2000, the highest level since 1994.
The association projects the outlook for warehouse space to be strong but weaker in 2001. Net absorption should drop 28.9 percent from 1999 to a total of 96 million square feet this year. The national availability rate should rise from 7.4 percent in the first quarter to 7.7 percent by the end of the year. Warehouse rents, adjusted for inflation, are projected to rise 1.2 percent in 2001. Based on rent growth, the hottest warehouse markets are expected to be in Milwaukee; Palm Beach County, Fla.; Orange Country, Calif.; Riverside, Calif.; and East Bay, Calif.
In the retail market, NAR reports 26 million square feet was absorbed in the fourth quarter, down 17.0 percent from the third quarter. Although this reflects the closure of retailers such as Montgomery Ward and Bradlees, this absorption level is still considered strong. At the same time, net new space completions totaled 31 million square feet. The national vacancy rate for all of 2000 was relatively low at 9.5 percent, down 0.7 percentage points from 1999. Rents rose at an inflation-adjusted 3.2 percent in the fourth quarter, down from a 3.6 percent growth in the third quarter. Construction starts in the 54 markets tracked were at 38 million square feet in the fourth quarter, down 22.4 percent from the third quarter.
The association projects that net absorption will slow in the first half of the year, then rise during the second half. The vacancy rate in the 54 markets tracked is expected to rise to 9.9 percent in 2001 from 9.5 percent last year. Rents are expected to rise an inflation-adjusted 1.8 percent this year. Based on rent growth, the hottest retail markets are expected to be in Palm Beach County, Fla.; San Francisco; Portland, Ore.; Denver and Houston.
In the lodging market, the association reports demand growth remained a healthy 3.7 percent in 2000, even exceeding room supply additions. This resulted in a 0.4 percentage point increase in the room occupancy rate to 63.5 percent in 2000. At the same time, average daily room rates rose 4.9 percent. Revenue per available room grew by an inflation-adjusted 2.1 percent in 2000. Construction in the 54 markets tracked stood at 9.8 million square feet in the fourth quarter, near the lowest level in the last four years.
NAR expects lodging demand growth to subside in 2001, resulting from a general softening in lodging fundamentals. Revenue per available room is expected to grow 3.3 percent this year. Based on revenue per available room, the hottest lodging markets this year are expected to be in Boston; Los Angeles; San Francisco; Orange County, Calif.; and Riverside, Calif.
In the multifamily sector, the association reports strong activity as the renter population increased in the fourth quarter, resulting in a net absorption of approximately 42,200 units. At the same time, net completions of new rental units were high at 52,300 units in the fourth quarter. In the 54 markets tracked, rental vacancy rates were relatively low at 5.0 percent in the fourth quarter. Inflation-adjusted rents rose a solid 5.2 percent in the same time frame. Construction rose 3.0 percent from the third quarter to 62,200 units in the fourth quarter.
NAR's outlook for multifamily housing projects solid demand through the first half of the year, moderating in the second half. As a result, the vacancy rate in the 54 markets tracked is expected to rise gradually to 5.5 percent in 2001. Inflation-adjusted rent is projected to rise 2.9 percent this year. Based on rent growth, the hottest multifamily markets are expected to be in Austin, San Diego, San Jose, Northern New Jersey and East Bay, Calif.
NAR will release first quarter data on July 2, and the second quarter report on September 27. A forecast for 2002 will be released at the Annual Conference in Chicago on Nov. 2. A new forecasting model will enhance NAR's commercial series, beginning with the first quarter report this summer.
*Collection of commercial statistics lags behind the residential market because comparable databases are not yet available.