CRE: Still in the Hospital But Out of the Intensive Care Unit

staff photo of Lawrence Yun
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To a packed house at the NAR Midyear Legislative Meetings, NAR Chief Economist Dr. Lawrence Yun said you might not “feel the impact of the recovery — the hole was so deep, it might still feel like we’re in it.”  During his Economic Issues & Commercial Business Trends presentation, Yun identified some bright spots — citing sales and leasing volumes for commercial real estate heading upward;  but he continued to forecast some looming concerns and said financing remains a major stumbling block.

The commercial sector is expected to strengthen more over the next couple of years even as the end of commercial mortgage backed security (CMBS) activity is happening, but banks — particularly regional banks — are stepping in with portfolio loans.  Interestingly, the big-four national banks — Wells Fargo, Citibank, Chase, and Bank of America — are in a far better position to make loans.  They are not yet stepping up, but they are sitting on piles of money.  “Because they’ve grown to the point where they’re too big to fail, they have a de facto implicit federal guarantee,” Yun said.

A big concern looming is inflation.  It remains essentially low – about 2.9 percent – but inflation could rise and hit 5 percent by the end of the year and 6 percent in the early part of 2012, Yun predicted.

The top line on commercial sectors:

  • Multifamily housing has been the standout over the last year. Vacancies hit historically normal levels last year at about 5-6 percent with solid rental rate growth.  Look for 4 percent higher rents nationally by the end of this year – and more in some first-tier markets.
  • Office market vacancy rates are expected to decline steadily, from 16.5 percent in the first quarter of this year to 16 percent at the end of the year. Rental rate increases could turn positive for the first time in a while, too, to maybe 5 percent from a negative 2 percent.
  • The Industrial sector is expected to improve with vacancy rates projected to decline from 14.2 percent to about 12.9 percent at the end of the year and positive rental rate growth of about 2 percent this year.
  • Retail continues to struggle, with consumers still retrenching in their spending. Vacancy rates are only expected to improve marginally, from about 13 percent to just slightly better by the end of the year. Even so, the sector might see some improvement in rental rate growth, moving from a negative 1 percent to 1 percent in positive territory by the end of the year.

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