Commercial Performances Decent In '07, But Shaky '08

February 11, 2008
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Commercial property markets worldwide enjoyed a strong year in 2007 with slightly declining vacancy rates, rising rents and record sale prices, according to the 22nd annual Global Market Report released by NAI Global. However, according to a news release, the outlook for 2008 is clouded by uncertainty following the mid-year emergence of the sub-prime debt problems, volatile credit markets and record high oil prices.

“Fears of a slowing U.S. economy and the credit crunch are clearly having an effect on investment real estate markets, even though commercial real estate fundamentals remain strong,” stated NAI Global President and Chief Executive Officer Jeffrey M. Finn. “However, we believe the slowdown in activity is only temporary as the credit markets sort themselves out and a new pricing equilibrium is established. The U.S. economy remains fundamentally strong and supply is tight, especially in resurgent downtown areas. The U.S. story is counterbalanced by a dynamic global landscape with vast new markets continuing to grow at a rapid pace.”

“Some pundits are predicting an imminent recession in the United States and eventually they will be correct as they have been predicting a recession for the past five years,” added NAI Global Chief Economist Dr. Peter Linneman, Professor of Real Estate at the Wharton School, University of Pennsylvania, and principal of Linneman Associates. “The U.S. economy is too strong, and most companies and consumers are simply too well capitalized for a recession to be triggered by the current capital markets disarray.”

Finn further noted opportunities will emerge from the current volatility. The credit crunch is leaving many domestic investors on the sidelines for the time being, but a weak U.S. dollar and the relative returns to other global real estate markets make U.S. real estate quite attractive to offshore investors.”

In 2007, U.S. markets reported generally tightening vacancies and modest increases in rents. With any lingering remnants from the dot-com bust erased in 2006, the supply side is remarkably stable, as evidenced by the modest drop in the vacancy rate for Downtown Class A office space from 9.85 percent in 2006 to 9.55 percent in 2007. The 16.4 percent increase in the national average rental rate for Downtown Class A space translates into sticker shock for tenants with leases expiring in resurgent downtown areas such as New York City, Boston, San Francisco and Los Angeles, where supply is scarce and rents have risen more dramatically.

Suburban markets nationwide mirrored the vacancy trend without the velocity of rental rate growth. The national vacancy rate for Suburban Class A space declined slightly from 13.16 percent in 2006 to 12.87 percent in 2007, while rental rates increased 5.6 percent from $24.49 in 2006 to $25.87 in 2007.

Market conditions in the industrial sector also improved, with the biggest gains recorded in the bulk warehouse sector. Demand for bulk warehouse space has been strong in prior years, but not strong enough to keep pace with new supply. The national average vacancy rate for bulk warehouse space declined to 9.09 percent in 2007, its lowest level in more than five years, after increasing four of the five previous years.

Retail vacancy rates declined modestly in all categories and are at their lowest levels in more than five years. The most significant growth in rental rates occurred in regional malls, where the national average rose from $44.97 in 2006 to $46.26 in 2007. The rental rate for downtown retail climbed from $47.70 in 2006 to $48.09 in 2007.

“The outlook for 2008 calls for continued stability with moderate growth in occupancy and rental rates,” Finn stated. “Tenants in the most supply-constrained cities may have to consider other alternatives, such as splitting headquarters and back-office functions or relocating to lower-cost space in the suburbs.”

NAI Global is headquartered in Princeton, N.J., It manages a network of 8,000 commercial real estate professionals and 375 offices in over 55 countries, and completes over $45 billion in annual transaction volume. CQX

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