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Demand for Commercial Real Estate Space to Improve

March 21, 2002

WASHINGTON ? Despite a slowdown in commercial real estate markets during the fourth quarter of 2001, a favorable economic backdrop will consistently increase demand for commercial real estate space throughout the year and lead to positive market performance in 2003, according to theNational Association of Realtors®COMMERCIAL REAL ESTATE QUARTERLY.

The fourth quarter 2001 report* covers a wide range of statistics and market rankings for the major commercial sectors including the office, warehouse, retail and multifamily markets, as well as market sector forecasts.

NAR President Martin Edwards Jr., who is a commercial broker, said the overall increase in business and consumer demand is a big plus, generating a much-needed inventory drawdown. "Consumers set aside the uncertainty they felt immediately after the Sept. 11 attacks," he said. "Housing finished its best year ever, retail sales grew at a phenomenal rate and the economy showed unexpected gains in the fourth quarter. Businesses responded with renewed confidence by increasing their spending plans."

Edwards said commercial real estate markets typically lag the overall economy by six months to a year. "It should come as no surprise that demand for commercial space slowed in the fourth quarter, translating into a negative absorption rate for all of the commercial market sectors. The result is a near-record increase in vacancy rates, with the office sector showing the sharpest rise," Edwards said. "The good news is recent economic data continue to exceed expectations, resulting in an improved commercial real estate market outlook for this year and even more so for 2003, with retail and multifamily sectors expected to lead the upturn next year."

David Lereah, NAR's chief economist, said solid growth in the nation's Gross Domestic Product will have tangible results. "A continued rise in consumer demand this year will trigger hikes in industrial production and eventually lead to gains in jobs and income," he said. "This should boost both capital spending and profits. By next year, we expect demand for commercial space to accelerate faster than supply, but for most of this year we'll continue to see the supply of space rise somewhat faster than demand, depressing rents."

Office Market For the office market, NAR reported lackluster performance due to faltering employment as a result of restructuring; an estimated 37,000 office jobs were lost in the fourth quarter. In the 54 metro markets tracked, this translated into a negative net absorption of 33.7 million square feet in the fourth quarter.

With brisk construction of new office projects coming on the market, the vacancy rate rose to 14.1 percent in the fourth quarter, the highest since the second quarter of 1995. Office rent declined 6.6 percent from the fourth quarter of 2000 as many tenants continued to negotiate discounts and incentives. Construction slowed to 23.9 million square feet during the quarter, down from 66.2 million square feet a year earlier.

Based on rent growth, the hottest office markets during the fourth quarter of 2001 were in Palm Beach Co., Fla., up 4.4 percent from a year earlier; Riverside, Calif., up 2.3 percent; Houston, up 1.2 percent; Richmond, Va., up 0.5 percent; and Northern New Jersey, up 0.4 percent from the same period in 2000.

NAR projects net absorption of office space to turn positive this year, rising from a negative 12.6 million square feet in the first quarter to a positive 17.0 million square feet in the fourth quarter. Net absorption is expected to jump to 109.3 million square feet in 2003 from only 15.8 million this year. Construction of new space is forecast at 114.8 million square feet this year and 61.1 million in 2003. Slow absorption is expected to push vacancy rates to 15.6 percent this year; higher vacancies will cause rents to drop by 5.5 percent in 2002.

Fourteen office markets are expected to bounce back faster over the next two years, including Memphis, Tenn.; Hartford, Conn.; Nashville, Tenn.; Milwaukee; Oklahoma City; Baltimore; Pittsburgh; East Bay, Calif.; Dallas-Fort Worth; Orange County, Calif.; Seattle; Detroit; Boston; and Chicago.

Warehouse Market In the warehouse market, overcapacity in the tech sector and lags in production tempered demand for warehouse space in the fourth quarter. NAR reported net absorption in the 54 metro markets tracked at a negative 2.4 million square feet, the first time it has been negative since tracking began in 1982. At the same time, completions of new warehouse space also declined to a total of 34.7 million square feet from 39.7 million a year earlier, which raised the vacancy rate to 9.2 percent. On average, rents slipped 1.6 percent from a year earlier. Construction starts of new space dropped to 27 million square feet in the fourth quarter, down 40 percent from the same period in 2000.

Based on rent growth in the fourth quarter, the hottest warehouse markets were Houston, up 5.2 percent from a year earlier; Sacramento, Calif., up 4.6 percent; Orlando, Fla., up 4.1 percent; the Washington, D.C., area, up 4.0 percent; and Denver, where warehouse rents were 3.4 percent higher than the fourth quarter of 2000.

The association projects the demand for warehouse space will follow a steady upward trend in the 54 markets tracked. Net absorption should rise from a negative 6.8 million square feet in the first quarter of 2002 to a positive 11.5 million square feet in the fourth quarter; net absorption should reach 9.2 million square feet for the year as a whole and rise to 109.6 million square feet in 2003. The national vacancy rate is forecast to rise to 10.5 percent in 2002, then drop to 9.1 percent next year. Warehouse rents should decline 3.2 percent in 2002.

Twenty-nine of 54 markets are expected to bounce back more quickly over the next two years, led by Richmond, Va.; Nashville; Cincinnati; Columbus, Ohio; and Miami.

Retail Market NAR reported that demand for retail space in the 54 metro markets tracked fell to a negative net absorption of 22.6 million square feet in the fourth quarter. At the same time, new space completions totaled 32 million square feet. As a result, the average retail vacancy rate climbed to 12.1 percent in the fourth quarter, up from 9.1 percent in the same quarter of 2000. Rents declined an average 1.0 percent in the fourth quarter from the same period a year earlier, the largest drop since 1994. Construction starts totaled 38 million square feet in the fourth quarter, the lowest since 1998.

Based on rent growth, the hottest retail markets in the fourth quarter of 2001 were in Sacramento, up 6.5 percent from a year earlier; Oklahoma City, up 4.3 percent; the New York City area, up 2.4 percent; Fort Lauderdale, Fla., up 2.0 percent; and Northern New Jersey, up 1.9 percent from the fourth quarter of 2000.

In the 54 markets tracked, the association projects that net absorption in the retail sector will rise from a negative 12.0 million square feet in the first quarter of this year to 26.0 million in the fourth quarter. Freestanding grocery stores, grocery-anchored shopping centers and stores selling household-related goods will continue to benefit from consumer demand. Net absorption is projected to reach 146.6 million square feet in 2003, four times the level projected for this year.

Delivery of new space is expected to reach 98.3 million square feet in 2002, exceeding demand, so the average vacancy rate in the 54 metro markets tracked is forecast to rise to 13.0 percent this year. In addition, retail rents are seen to decline 2.4 percent in 2002, then rise a marginal 0.4 percent next year.

Nine areas are projected to be growth leaders in the retail sector, including Memphis; Richmond; Las Vegas; Portland, Ore.; the Kansas City area; Atlanta; Dallas-Fort Worth; San Diego; and Philadelphia.

Multifamily Market In the multifamily sector, the association reported negative net absorption of nearly 2,800 units in the 54 metro markets tracked during the fourth quarter, the first time it has been negative since tracking began in 1982. Absorption for the year totaled 78,400 units, down from 216,900 units in 2000. Completions of new rental units came to 48,100 units in the fourth quarter, down from 52,300 a year earlier. With completions continuing to outpace absorption, the vacancy rate rose 0.9 percentage points to 5.9 percent during the fourth quarter. Average rents rose 1.4 percent in 2001. Construction starts of new apartments totaled 60,000 units in the fourth quarter, down 13.0 percent from the year-ago level.

Based on rent growth, the hottest multifamily markets in the fourth quarter were in Palm Beach County, Fla., up 9.3 percent from a year earlier; Salt Lake City, up 7.9 percent; San Francisco, up 6.7 percent; Tampa, Fla., up 6.7 percent; and Sacramento, up 5.7 percent from the fourth quarter of 2000.

NAR projects the apartment rental market will experience a negative net absorption of 11,500 during the first quarter, and vacancy rates will rise to 6.4 percent. Net absorption for 2002 is expected to total 30,500 units, then rise to 148,600 next year. Completions of new space will total 154,100 units this year and 82,900 in 2003. This will cause the average vacancy rate to rise to 6.8 percent by the end of this year, while average rent is projected to rise a modest 0.3 percent in 2002.

Sixteen apartment rental markets are forecast to have the most favorable demand/supply fundamentals over the next two years, including Raleigh, N.C.; Indianapolis; Honolulu; Nashville; Salt Lake City; Hartford; Memphis; Columbus; San Jose; Portland; Milwaukee; Orlando; Cincinnati; Dallas-Fort Worth; San Francisco; and Washington, D.C.

Source: The National Association of Realtors



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