Commercial Real Estate Sectors Basically Strong And Improving

11/20/2006


Commercial real estate sectors are on solid ground with generally tightening vacancy rates and sound fundamentals, according to a commercial market update and forecast presented at a forum on commercial business trends at the National Assn. of Realtors 2006 Conference & Expo, which convened in New Orleans in November.

According to Lawrence Yun, NAR senior economist, the expanding economy is pulling up commercial sectors.

Commercial lending volume is up, and delinquencies are down. High construction costs are holding speculative activity in check, but the value of newly finished construction is running nearly 10% above a year ago, Yun explained. Imports and exports remain at high levels, sustaining demand in warehouse and distribution facilities. Corporate profits are strong, providing the wherewithal for businesses to expand. Hotel occupancies have been rising this year and are the highest since 9/11.

"Nearly 4 million new jobs have been created in the past two years, which in turn is creating need for additional commercial space, notably in the office sector," Yun said. "Wage growth is picking up, household net worth has reached a new high and oil prices have been falling—all providing a nice backdrop for continued expansion in the commercial sector."

The commercial property rate of return has averaged in the range of 3.5% to 4.0% this year, according to the National Council of Real Estate Investment Fiduciaries, with a weaker performance in the retail sector.

While the present forecast is positive, said NAR officials, potential risk factors for the future include oil prices, interest rates and higher construction costs resulting from global economic expansion; all are being closely monitored for any market impact.

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