NAR: commercial real estate solid and improving.

Commercial real estate sectors are on solid ground with generally tightening vacancy rates and sound fundamentals, according to the National Association of Realtors[R] (NAR), Chicago.

Commercial real estate is fundamentally sound with growing jobs and expanding businesses, noted NAR Senior Economist Lawrence Yun. "We're seeing record levels of mergers and acquisitions, and institutional investors have returned in a big way," he said.

Commercial lending volume is up and delinquencies are down, noted Yun. Furthermore, high construction costs are holding speculative activity in check, but the value of newly finished construction is running nearly 10 percent above a year ago.

Imports and exports remain at high levels, sustaining demand in warehouse and distribution facilities. Corporate profits are strong, providing the wherewithal for businesses to expand. Hotel occupancies have been rising this year and are the highest since Sept. 11, 2001.

"Nearly 4 million new jobs have been created in the past two years, which in turn is creating need for additional commercial space--notably in the office sector," Yun said. "Wage growth is picking up, household net worth has reached a new high and oil prices have been falling--all providing a nice backdrop for continued expansion in the commercial sector."

However, Yun noted that potential risk factors for the future include oil prices, interest rates and higher construction costs resulting from global economic expansion; all are being closely monitored for any market impact.

With healthy job growth, office market vacancy rates continue to fall in most major markets and are expected to average 12 percent to 13 percent in 2007--a steady downtrend since exceeding 16 percent in 2004. After falling in the first part of the decade, average office rents are projected to grow 7.5 percent to 8.5 percent in 2007, while new office completions are forecast in the range of 35 million square feet to 40 million square feet, said NAR.

Trade and distribution continue to drive the industrial real estate market, with a lack of suitable inventory in traditional and inland ports fueling build-to-suit facilities.

A low inventory-to-sales ratio and a low wholesale-inventory-to-sales ratio mean there is a need to restock, creating the demand for more space. In addition, orders for durable goods are rising. Some urban industrial properties are being redeveloped for mixed-use and residential purposes, said NAR.

Vacancy rates in the industrial sector should average 9.7 percent to 9 percent in 2007, a steady downtrend since early 2004 when they were close to 12 percent. Rents are expected to increase 3.5 percent to 4 percent in 2007, while new industrial space coming online is estimated at 155 million square feet to 160 million square feet, and net absorption of space has been trending up all year.

Regional shopping centers have been impacted by vacancies resulting from the merger of Federated and May department stores, and consumer confidence--which has been fairly steady but iffy--is dampening retail leasing. On the upside, personal income is rising, and retail sales have been healthy to date, said NAR.

Retail vacancy rates are likely to rise to an average of 7.8 percent to 8.2 percent in 2007. After dropping about 1.5 percent in 2006, average retail rent is forecast to increase 2.5 percent to 3 percent in 2007, with 20 million square feet to 25 million square feet of new space coming online.

The apartment rental market--multifamily housing--is strengthening as potential homebuyers remain in rental housing. New supply is matching absorption, keeping vacancy rates fairly flat--in 2007 they are projected to average 5.2 percent to 5.3 percent. Average rent should rise 4.5 percent to 5 percent in 2007.

Between 220,000 and 225,000 new units are likely to come on the market in 2007. Not surprisingly, said NAR, the highest demand is in areas where population growth is greatest. Institutions are very active in acquiring investment-grade apartments, and condo conversions have almost completely stopped.