Patricia Nooney of St. Louis, chair of the Realtors(R) Commercial Alliance Committee, said the investment cycle appears to be turning. "It looks like investors are taking a wait-and-see attitude," she said. "Even with fairly stable fundamentals and capital available from institutional investors, it appears investor confidence has declined, and some private investors have had problems obtaining financing. Commercial real estate investment set a new record in 2007, but now that we're in a period of economic uncertainty, transaction volume is likely to decline."
Investment in commercial real estate in 2007 was $427.2 billion, up 39.2 percent from the previous record of $306.8 billion in 2006; that total does not include transactions valued at less than $5 million or investments in the hospitality sector, based on analysis of data from Real Capital Analytics. NAR projects the investment dollar volume this year could drop by 30 to 40 percent, comparable to 2006 levels.
Office Market
There is a lag factor in the current office market to backfill space by tenants who moved into newly constructed space. At the same time, concerns about the overall economy are causing some tenants to put expansion or relocation plans on hold. These present a challenge to timely and cost-effectively lease space in older office buildings. Since the level of new supply will be greater this year, office vacancies are expected to rise to 13.3 percent in the fourth quarter from 12.5 percent in the last quarter of 2007. Annual rent growth in the office sector is forecast at 3.5 percent in 2008, following an 8.0 percent gain last year.
Industrial Market
Industrial activity remains strong in port and distribution hubs, with relative weakness around many manufacturing centers. International trade continues to play a pivotal role in industrial real estate. Vacancy rates in the industrial sector will probably average 9.6 percent in the fourth quarter of 2008, up from 9.4 percent in the same period last year. Annual rent growth is projected at 3.3 percent by the fourth quarter, down from 3.6 percent at the end of 2007.
The areas with the lowest industrial vacancies include Los Angeles; San Francisco; Tucson, Ariz.; Salt Lake City; Orange County, Calif.; and Portland, Ore., all with vacancy rates of 6.1 percent or less. Los Angeles is expected to remain a landlord's market for the next four to five years. Net absorption of industrial space in 58 markets tracked is likely to total 134.7 million square feet in 2008, up from 120.2 million last year. Industrial transaction volume in 2007 was a record $46.0 billion, compared with $38.9 billion in 2006.
Retail Market
The supply of new retail space is finally being held in check, although secondary markets might be growing because new space often follows population growth. As secondary and tertiary market populations continue to grow, it will become necessary to track those markets in addition to monitoring older retail centers. Vacancy rates in the retail sector are expected to decline to 8.8 percent in the fourth quarter from 9.2 percent in the fourth quarter of 2007. Average retail rent is forecast to grow by 1.4 percent in 2008, compared with a 3.2 percent rise in 2007.
Multifamily Market
The apartment rental market - multifamily housing - is attracting risk-averse institutional investors. Of the record $98.6 billion spent in this sector last year, 40 percent of acquisitions were from institutional investors such as pension funds and life insurance companies. Private investors were equally active, accounting for another 40 percent of transactions. Many potential first-time home buyers continue to rent, placing downward pressure on vacancy rates and upward pressure on rents. The number of new multifamily units remains relatively high, due in part to the conversion of condo projects into rental buildings - notably in the Washington, D.C., area and South Florida.
Multifamily vacancy rates should average 4.8 percent in the fourth quarter, down from 5.1 percent in the fourth quarter of 2007. Average rent is seen to rise 5.3 percent in 2008, up from a 3.1 percent increase in 2007.
