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Commercial Real Estate to Begin Recovery in 2011

Despite current reports of stabilization within the economy, commercial real estate sectors continue to be negatively impacted by fallout from the recession, but according to the ""National Association of Realtors"":http://www.realtor.org/ (NAR), there is hope for some improvement by next year.

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Lawrence Yun, NAR chief economist, explained that commercial real estate almost always lags the economy. As a result of the lingering impact from the deep recession over the past two years, Yun said vacancy rates will trend higher this year, and many commercial property owners will need to make rent concessions. With time, though, the market will recover.

""With the job market expected to turn for the better later this year, we'll see rising demand for office and warehouse space, but that isn't likely before 2011,"" Yun said. ""At the same time, improved consumer confidence would help sustain the retail sector and encourage more people to enter the rental market.""

NAR isn’t the only association forecasting a possible recovery in the making. The Society of Industrial and Office Realtors (SIOR) Commercial Real Estate Index, an attitudinal survey of more than 700 local market experts, found that 55 percent of SIOR members expect the market to improve in the second quarter of this year.

In the fourth quarter of 2009, the SIOR index rose 0.2 percent to 35.5, compared with a balanced marketplace level of 100. While this was only a slight increase, it was the first gain in the index following 11 consecutive quarterly declines.

On the other hand, SIOR said while some indicators show the decline in commercial property values is beginning to flatten, 86 percent of respondents report prices are below replacement costs. In addition, nearly nine out of 10 survey participants said new commercial development is virtually nonexistent in their market areas, and rent concessions are reported almost everywhere.

According to an independent survey cited by NAR, more than 20 banks are willing to expand commercial credit this year--a critical step towards recovery. The lending expansion is aided by the Federal Reserve's Term Asset-Backed Loan Facility, which is encouraging issuance of commercial mortgage-backed bonds. Additionally, regulators are prodding lenders to extend terms for many existing commercial loans.

""We have a long way to go for satisfactory levels of commercial credit, but these are important first steps,"" Yun said. ""Given that about $1.4 trillion in commercial debt will come due over the next three years, more extensive action is needed and the Fed needs to more actively help resuscitate commercial mortgage-backed securities. The credit improvement will mean more commercial property sales in 2010, even some at deeply discounted prices.""

Although the beginning stages of recovery seem to be on the horizon, the commercial real estate market isn't out of the woods yet. According to NAR's latest Commercial Real Estate Outlook, which analyzes quarterly data in the office, industrial, retail, and multifamily markets, commercial vacancy rates will generally stay at elevated levels throughout this year.

With the influx of sublease space currently available in the office market, vacancy rates in this sector are forecast to increase from 16.3 percent in the fourth quarter of 2009 to 17.6 percent in the fourth quarter of 2010, and next year vacancies are expected to average 17.4 percent. In the 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be negative 27.3 million square feet in 2010. In addition, annual office rent is projected to fall another 7.2 percent in 2010, following the 12.7 percent decline in rent prices last year.

There is proportionately less industrial sublease space on the market than in the office sector, but obsolescence remains a factor, NAR said. As a result, industrial vacancy rates are expected to jump to 14.9 percent in the fourth quarter of this year, up from 13.9 percent in last year's fourth quarter. By 2011, vacancy rates in this sector are forecast to average 14.5 percent. In 2010, the net absorption of industrial space in the 58 markets tracked is projected to be negative 93.5 million square feet, and annual industrial rent is estimated to fall 9.6 percent, after declining 10.9 percent in 2009.

Vacancy rates in the retail market are projected to edge up from 12.4 percent in the fourth quarter of 2009 to 12.7 percent in the same quarter this year, and rates may hold at that level in 2011. In the 53 markets tracked, net absorption of retail space is forecast at negative 3.4 million square feet in 2010, and retail rent prices are forecast to fall another 2.4 percent this year, following a drop in the average rent of 4 percent in 2009.

As the apartment rental market is poised to gain from a rise in household formation, NAR's multifamily forecast was notably more positive than that of the other markets. Vacancy rates in this sector are likely to decline from 7.4 percent in the fourth quarter of last year to 6.6 percent in the fourth quarter of this year, and by 2011, vacancy rates may fall to 6.1 percent. Net absorption in the multifamily market is expected to be 115,000 units in the 59 tracked metro areas, and average rent, which fell 3.6 percent in 2009, is projected to decline another 3.4 percent in 2010.

About Author: Brittany Dunn

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