Real estate markets continue to rebound.

A year after the real estate recession hit bottom, property markets are still struggling with high vacancies and loan delinquencies, but clear signs of improvement are evident, according to Coopers & Lybrand.

A recent analysis of U.S. real estate conducted by Coopers & Lybrand found vacancy rates in every property category dropped slightly, except the office sector, where vacancies declined even more.

The analysis charts inventory, vacancies, delinquency rates on loan principal, and the outlook for six property types. Coopers & Lybrand prepares this survey annually as part of a program to quantify the condition of the U.S. real estate market. Data for the analysis were assembled from a variety including F.W. Dodge, CB Commercial, Cognetics, the National Research Bureau, the U.S. Bureau of the Census, the U.S. Dept. of Housing and Urban Development, the REIS Reports, and Coopers & Lybrand's own research.

"Overall, progress has been incremental rather than dramatic," says Dr. Bjorn Hanson, Coopers & Lybrand's national real estate industry chairman. "Most property types and regions are clearly rebounding, and others are still coping with problems."

The news was mixed for commercial loans, where delinquency rates fell to 6.3 percent for the first three quarters of 1993. Hotel delinquency rates dropped significantly to 11.3 percent for the first three quarters of 1993 from 15.1 percent for the full year of 1992, but are still high at 11.3 percent. Office delinquencies dropped to 8 percent from 8.9 percent the previous year and the multi-family delinquency rate fell to 4.7 percent from 5.9 percent, a significant reduction of an already low rate.

Retail and single family delinquency rates still hover around 5.4 percent and 2.7 percent, respectively. But industrial delinquencies, though still low, have risen nearly 30 percent to 4.9 percent from 3.8 percent in the previous year. The sharp rise reflects the heavy concentration of loans in California, the last place the recession hit and the area yet to show signs of recovery.

Industrial

Industrial loan delinquencies have consistently been the lowest of all property types. While other types of property delinquencies peaked in 1992 and have fallen steadily ever since, industrial loan delinquencies continued to rise in 1993.

The availability of large warehouse space has remained steady at 8.5 percent of supply in 1993. Vacancies in most industrial markets are slowly decreasing, but the more sluggish' recovery of some large markets, notably in the east and California, is reflected in the unchanged national weighted average vacancy rate.

Industrial employment, averaging 29,600 over the first 11 months of 1993, was down marginally from 1992, while new construction dropped to about three-quarters of 199Ts already low level. New construction is primarily in built-to-suits, while new speculative construction is virtually non-existent. If absorption and construction rates hold steady in 1994, national availabilities will drop by two percentage points compared to 1993, according to Coopers & Lybrand.

Retail

The retail sector remains in flux because retail itself is rapidly changing. Value retailers, who saw their share of the market balloon from eight percent of retail sales in 1981 to 35 percent in 1992, have captured retail sales shares from traditional department stores. New alliances between real estate, manufacturers, media, and retailers should further transform the shopping experience with the proliferation of manufacturers outlet stores and interactive home shopping possibilities, according to Coopers & Lybrand.

Retail construction persists mainly because of changes in the retail format. Competition among formats for the same successful retailers have caused some discounters and specialty retailers to replace department stores as anchors in regional malls, entire malls to convert to a value orientation, and smaller strip centers to reduce store units to attract non-apparel, value-oriented specialty stores. In 1993, mall construction was at its lowest rate since 1967, with only 41.6 million square feet started, but single store starts, including the "big boxes" favored by some value retailers, soared to 146.6 million square feet.

Hotel

A stronger economy and continued slow growth in the supply of new hotel rooms boosted third quarter 1993 occupancy to 71.5 percent, its highest rate in more than a decade. The relatively small 2.1 percent gain in occupancy from the previous year was artificially depressed by the surge in 1992 occupancies in the aftermath of Hurricane Andrew, which increased demand in southeast Florida's lodging facilities as temporary housing. On an annualized basis, however, the quarterly gain was a hefty 4.8 percent.

The industry is poised for profitability after a $500 million to $1 billion profit in 1993 - the first year since 1981 that the industry is in the black. Occupancies increased to 64 percent in 1993 (and 66.1 percent predicted in 1994), although average daily room rates rose only an estimated 1.9 percent over the prior year.

Single Family

Although the single family market has been in recovery since 1991, it showed marked improvement in 1993. Mortgage interest rates at lows not seen in a generation were an important factor in the brightening picture, but rates have been decreasing since 1992. Much more important has been the combination of low rates and the strengthening economy, which have restored consumer confidence and resulted in increased new home sales, resales and new construction starts.

Multi-Family

The multi-family market has not rebounded like the single-family market, with only 160,000 new units started in 1993 and a projected 200,000 starts for 1994. Economists at the National Association of Home Builders believe this volume is still below replacement levels.

In the recent past, affordability problems for single-family homes have heightened rental demand, but rapidly declining home mortgage rates, sliding single-family home prices and increased consumer confidence have narrowed the cost differential between renting and owning to the detriment of the residential investment market.

The slide in the condominium portion of the multi-family market, comprising 27 to 30 percent, has abated, but new construction of rentals is still in decline. The restoration of the Low Income Tax Credit Program should bolster production.

Office

The office market shows clear signs of stabilization today, with new construction at its historically lowest level since 1970 (the first year F.W. Dodge has data for) and new job growth slowly and unevenly accelerating across the U.S. Nearly 1.7 million new jobs were created in 1993, while only 80.2 million square feet of office space were started in 1993.

Although the free-fall in rents and values may have abated, it will still be years before some markets recover. However, certain sections are already experiencing an upturn. Shortages of large blocks of Class A are apparent, notably in sections of Washington D.C., Midtown Manhattan and Atlanta.

Overall, vacancy has declined nationwide, and office property loan default rates are down 11.3 percent since 1992. A continuation of 1993's construction and absorption trends will reduce the 1994 vacancy rate to 16 percent nationally and even lower in many individual markets, according to Coopers & Lybrand estimates.