Commercial Real Estate Readying For A Rebound In 2003.

Business Editors, Real Estate Writers

WASHINGTON--(BUSINESS WIRE)--May 17, 2002

Most commercial real estate sectors can expect a prolonged period of recovery, according to a presentation at a commercial forum at the National Association of Realtors(R) Midyear Legislative Meetings & Trade Expo.

More than 7,000 Realtors(R) and guests are attending the May 14-18 meetings.

Susan Hudson-Wilson, chief executive officer of Property and Portfolio Research LLC (PPR), said the improving economy will lead to an eventual upturn in commercial real estate, which typically lags behind changes in overall economic activity. PPR provides independent real estate research and portfolio strategy services to the institutional real estate community.

Hudson-Wilson said unemployment is peaking now at 6.0 percent, consumer confidence is improving, inflation is low and productivity is high. "Job growth has been sputtering but should recover over the next several months, and growth in the U.S. Gross Domestic Product should reach 4.3 percent within 20 months," she said. "The 5.8 percent GDP growth in the first quarter begs the question of whether we had a recession at all."

Part of the strength in the economy is directly attributable to population growth. "The economy thrives on population growth, which has been stronger than anticipated," Hudson-Wilson said.

She said the reviving economy bodes well for commercial real estate sectors across the country, with most of the gains expected to occur in 2003. Given the lag in the commercial sector, preliminary data for the first quarter shows that demand for office, warehouse and retail space, as well as apartment units, was once again flat to declining.

"The 'tech wreck' is creating negative net absorption in the office market, which spread to financial services, advertising and consulting," Hudson-Wilson said. In addition, new office space has been coming online. Preliminary office vacancy rates increased in 54 markets tracked during the first quarter, hitting 14.5 percent, which is the highest since late 1995. Even so, office vacancy rates are considerably below their peak levels posted in the early 1990s.

Apartment vacancies rose 0.9 percentage points in the first quarter to 5.9 percent, and demand is expected to fall further. "There is just too much construction now relative to demand," Hudson-Wilson said. The echo boom generation, which is roughly the same size of the baby boom, will provide a boost in the future but won't be a major factor for a while.

In the retail sector, space has been increasing but sales have been rising faster. Store-based sales in March rose 5.2 percent from a year earlier, with consumers pushing dollars to discounters. Consumer demographics, with a focus on people aged 45 to 54, are expected to keep spending at high levels over the next eight years, meaning demand for retail space is sustainable.

Warehouse vacancy rates rose from 7.1 percent a year ago to 9.2 percent today, the highest since 1994. However, the supply is starting to slow, and there are more buyers of industrial products than sellers. The best markets are port cities and supply-constrained markets.

A continued improvement in leasing activity enhances the overall commercial outlook for 2003. "Construction is expected to ease, while rising demand will strengthen occupancy and rents next year," Hudson-Wilson said. The retail and warehouse sectors are expected to lead the upturn in 2003.

In terms of investment, Hudson-Wilson projects a minimum of $91 billion of new investment will flow into the commercial sectors this year based on the relative value of property compared with stocks.

The National Association of Realtors(R), "The Voice for Real Estate," is America's largest trade association, representing more than 800,000 members involved in all aspects of the residential and commercial real estate industries.

Information about NAR is available at http://realtor.org. This and other news releases are posted in the Web site's "News Media" section under NAR News Releases. Statistical data and surveys may be found at http://realtor.org/research.