US Commerical Real Estate Surges – Needs Corporate Hires to Continue

First quarter commercial real estate market fundamentals continued their improvement over 2010. This will come as no surprise to anyone who understands that commercial real estate demand is derived from activity in the overall economy. As the economy goes, so go commercial real estate fundamentals.

When looking at the change in economic indicators outlined below, the continued improvement makes sense. Just consider:

• This time last year unemployment was at 10.2% versus 8.8% today.
• Since the February 2010 employment trough, 1.7 million jobs have now been added.
• Manufacturing capacity utilization now stands at 74.3%, up from 69.7% in February of 2010.
• The S&P 500 has doubled from its March 2009 low.

Maybe the most important indicator is investor confidence.  According to Price Waterhouse Coopers’ First Quarter 2011 Real Estate survey, it’s on the rise.

Clearly there has been an improvement in the national economy, which has translated into improved commercial real estate fundamentals. Now let’s look at the specific first quarter results.

Office Market
According to CoStar’s first quarter reports, the office market saw a positive net absorption of 5.36 million square feet of office space. This marks the fourth consecutive quarter of positive net absorption with almost 35 million square feet added over the last 12 months. For comparison, the previous twelve months saw the market lose 30 million square feet.

Office vacancy rates held steady at 13.4 percent, even in the face of an slight rise in new deliveries.

CoStar’s quarterly reports also show that office rental rates turned slightly downward after a fourth quarter rise, which was the first in 10 quarters. With office construction at a record 10-year low, there is no denying that an increase in corporate hiring would accelerate the strengthening of office market fundamentals.

Retail Market
CoStar is also showing a positive net absorption of 9 million square feet of retail space in the first quarter of this year. A total of 58 million square feet was added during the last 12 months, which is more than triple the amount added in the previous twelve months. Even with major retailers like Borders and K-Mart closing up big box stores around the country, the retail vacancy rates continued their decline, dropping to 7.2 percent, down from the market high of 7.6% in 2009.

Retailers are starting to wise up as construction deliveries resumed their decline, falling 50 percent from their first quarter 2010 level and rental rates continued their decline albeit at a slower pace.

Industrial Market
CoStar’s Q1 Industrial Market Report shows that the first quarter of 2011 saw strong positive net absorption of 27.39 million square feet of industrial space. This is the fourth straight quarter of positive net absorption, with more than 58 million square feet of industrial space being absorbed over the last 12 months. Considering industrial space shrank by 123 million square feet the previous twelve months, this news is a welcome sign that things are picking up in the industrial sector.

CoStar’s report also shows that Industrial vacancy rates continued a slow but steady decline, falling to 10 percent, down from their market high of 10.5 percent in 2009. Also industrial deliveries are down 56 percent from their first quarter 2010 level.

Over the last 12 quarters, 11 have seen a decline in the amount of new space delivered. This is not surprising considering the nature of industrial real estate and its ability to quickly shut off new supply. Rental rates continued their decline albeit at a much slower pace than for the same period last year.

As with office and retail, projects under construction are at a record 10-year low due to an increase in corporate spending would accelerate the strengthening of industrial market fundamentals.

All of this analysis through CoStar’s quarterly reports begs the the next logical question: Will this improvement continue and if so at what pace?

Both the sustainability of the current recovery, which has been occurring for more than a year in all property types, and future strength of the recovery, depends on the levels of corporate hiring and spending.

If corporations increase their rate of hiring and spending, then the commercial real estate recovery will not only be sustainable but also will strengthen. If corporations hold hiring levels steady and do the same with their spending levels, then the sustainability of the recovery will be more dependent on other factors such as the impact of rising oil prices on consumer spending.

Corporations hold the key to the future of commercial real estate’s market fundamentals.

Source: Forbes

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