Commercial Real Estate Rents to Rise as Vacancies Decline.

ORLANDO, Fla. -- General improvements in the commercial real estate sectors are expected over the next two years, according to a forecast released at a commercial real estate forum during the annual National Association of Realtors(R) (NAR) Conference & Expo here.

David Lereah, NAR's chief economist, said the commercial forecast is optimistic. "The improving economy in the United States has been creating jobs, and those jobs have been increasing the demand for commercial real estate space," he said. "There's been continued strengthening in the net absorption of commercial space this year, with absorptions of industrial, office, and retail spaces solidly higher compared to 2003."

"The growing demand for commercial real estate space, which generally follows later in the cycle of an economic recovery, will improve cash-flow in the commercial sectors with rent growth projected to follow suit," Lereah said. "We expect overall rent gains next year and stronger gains in 2006, although growth in industrial rent should be at a slower pace given a large volume of new construction."

The forecast for four major commercial sectors is based on analysis of data in 57 metro areas tracked, including the office, retail, industrial and multifamily markets. It was produced by Torto Wheaton Research and Real Capital Analytics.

Net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, should rise strongly to 58.0 million square feet next year and 71.5 million in 2006, up from 45.3 million square feet projected for this year and 20.0 million in 2003. Vacancy rates in the 57 markets tracked are likely to decline to 15.0 percent in 2005 and 13.4 percent in 2006 from a projected 16.3 percent this year. Office rents should rise 1.4 percent in 2004, 1.9 percent next year and another 4.1 percent in 2006. In the retail sector, net absorption in the 57 metro areas tracked is forecast at 22.1 million square feet in 2004, nearly double the 11.8 million last year, then should hit 29.8 million square feet in 2005 and 24.0 million in 2006. With new space coming on line, the average vacancy rate for retail space is seen to be stable at 8.2 percent this year, compared with 8.1 percent in 2003; vacancies should be at 8.1 percent next year and 8.5 percent in 2006. Retail rents are likely to rise 3.6 percent this year, and then increase 4.2 percent in 2005 and another 4.2 percent in 2006.

The industrial market is experiencing a surge of net absorption, much of it build-to-suit, estimated at 97.4 million square feet in 2004 in the 57 markets tracked, up nearly six-fold from only 16.5 million in last year. Net absorption should continue to rise and reach 112.4 million square feet next year and 159.5 million in 2006. With a large volume of new space on the market, the national vacancy rate is expected to average 11.7 percent this year, slightly higher than the 11.6 percent rate in 2003, and then slip to 11.4 percent next year and 10.6 percent in 2006. After declining 1.3 percent this year, industrial rents are projected to be flat, slipping 0.2 percent in 2005 before rising 1.7 percent in 2006.

The apartment rental market -- multifamily housing -- should see a net absorption of 260,000 units in the 57 markets tracked this year, compared with only 159,400 in 2003. Net absorption is projected at 198,300 in 2005 and 202,000 in 2006. The average vacancy rate is forecast at 5.9 percent in 2004, down from 6.4 percent last year, and is expected to drop to 5.8 percent in 2005 and 5.5 percent in 2006. After rising 1.2 percent in this year, average rent is forecast to rise 2.2 percent in 2005 and 3.1 percent in 2006.

The next commercial real estate market forecast is scheduled for Dec. 14. More than 25,000 Realtors(R) and guests are attending the Nov. 4 through 8 meetings here.

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

Information about NAR is available at http://www.realtor.org. This and other news releases are posted in the Web site's "News Media" section in the NAR Media Center. Statistical data, charts and surveys also may be found in the NAR Media Center by clicking on Economic & Housing Statistics.

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