Commercial Market Sluggish, Yet Investment Continues to Improve
ORLANDO (November 9, 2012) – Despite the residential real estate market showing signs of progress and the economy steadily improving, the commercial market continues to recover at a sluggish pace. However, a positive outlook endures as commercial real estate remains a solid investment, according to National Association of Realtors® Chief Economist Lawrence Yun at the 2012 Realtors® Conference and Expo.
“The commercial real estate market was an innocent bystander of the housing crisis, and the broad credit tightening has made it much longer for the market to recover,” said Yun. “Commercial real estate depends on an expanding economy, as well as available credit, something that is extremely tight right now. However, despite some challenges in the market there are hopeful signs as commercial investments increase, most notably in the multifamily sector.”
Yun pointed out that most commercial sectors are continuing at a slow recovery pace. Demand for office space is modest. Yun predicts office completions will be low through the next year. Similar scenarios exist in the industrial and retail sectors, as well.
The multifamily sector maintains steady growth and demand is strongest in this area as it has been for some years now. Vacancy rates continue to drop while rents firm up. Yun highlighted that multifamily is the only sector where rents are outpacing inflation. Apartment vacancy rates have continued to decrease mostly due to young people who cannot obtain a mortgage, as well as families who encountered foreclosure.
Calvin Schnure, vice president, research and industry information at NAREIT, voiced similar predictions for the multifamily sector. “Pent-up demand continues to drive the multifamily sector while new supply falls short,” said Schnure. “Market conditions for multifamily have tightened since the housing crisis. There will continue to be improvement in all commercial sectors over the next few years; meanwhile very little supply will have much more demand on the market.”
Yun also touched on the crucial challenges Realtors® face in the commercial market. Leasing activity is increasing for larger transactions. However, Yun points out Realtors® mostly handle smaller transactions that are valued at less than $2 million. In addition, Realtors® report that they typically obtain commercial mortgages from smaller, community banks, according to NAR’s annual Commercial Real Estate 2012 Lending Survey. When speaking with Realtors® today Yun said financing has continued to tighten more so than this time a year ago.
“As a result of Dodd-Frank and the economic crisis, we’ve seen smaller lenders shut out while deposits for larger banks are increasing,” said Yun. “Realtors® are increasingly finding it difficult to obtain commercial mortgages. This is holding back the recovery potential in the market. With an adequate flow of capital as well as broad economic recovery, commercial real estate could experience modest improvement. Meanwhile the commercial market does remain a solid investment opportunity.”
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.