National commercial real estate market finally in recovery mode

The national commercial real estate industry follows the state of the overall economy, with a normal lag of about two years. But this economic cycle of a sluggish economic recovery has been different and the nation’s commercial real estate market is lagging about four to five years behind the overall economy, according to Lawrence Yun, chief economist and senior vice president of research for the National Association of Realtors.

As the U.S. economy slowly improves and job creation gains steam, the national commercial real estate market also finally is making gains.

“It’s been a long wait, but the commercial real estate market is turning around,” Yun said. “But it still has a long way to go to get back to normal.”

Yun will be the keynote speaker at the 12th annual BizTimes Media Commercial Real Estate and Development Conference, which will be held on Friday, Nov. 14, at Potawatomi Hotel & Casino in Milwaukee. He will provide an outlook on the national commercial real estate industry.

Yun

“We are finally starting to see occupancy rates rise,” Yun said.

The strongest national commercial real estate sector “without a doubt,” is the multi-family housing market, Yun said. The national vacancy rate for apartments is at about 4 percent, a “tight” market that is near decade lows for vacancy, he said.

As the population has grown, apartment occupancy rates are climbing but homeownership in the country has been flat, Yun said.

“People have become renters,” he said.

The Milwaukee area has experienced this as well with high occupancy rates spurring developers to build numerous apartment projects in and near downtown Milwaukee and in the suburbs.

The rise in apartment demand began after the housing market crash during the Great Recession, which led to higher mortgage lending requirements, Yun said. The average credit score of borrowers getting approved for mortgages today is at the very high end historically, he said.

“It’s very difficult to obtain a mortgage,” Yun said. “Even credit-worthy people are having a hard time.”

Also, many households are still rebuilding wealth lost during the Great Recession and cannot afford to purchase a home.

“It takes time to rebuild people’s credit and finances,” Yun said.

Another factor favoring the apartment market is the fact that many young adults in America are saddled with record high levels of student debt, which has contributed to fewer of them purchasing homes, he said.

The nation’s industrial real estate market has also improved, with a vacancy rate of 9 percent, which puts it at a normal level, Yun said.

The southeastern Wisconsin industrial real estate market is performing even better, with a 5.5 percent vacancy rate in the third quarter, according to Xceligent.

The improved economy has boosted the national industrial real estate market, as has increased warehouse demand to serve international trade and the growth of internet sales, Yun said.

But while the growth of Internet retail has boosted the industrial real estate market, it has hurt the retail real estate market, Yun said.

In addition, consumer spending is only rising at a 2 percent annual rate instead of the normal 3 to 4 percent growth rate.

“Consumer spending is rising, but sluggishly,” Yun said.

The national retail real estate market has a vacancy rate of about 10 percent, compared to a historic rate of 7 to 8 percent. In southeastern Wisconsin the retail space vacancy rate in the third quarter was at 8.4 percent, according to Xceligent, up from 7.7 percent a year ago.

“Retail (real estate) appears to be the weakest (U.S. commercial real estate sector),” Yun said.

The U.S. office market is making a slow recovery, Yun said. The national office space vacancy rate is about 16 percent, compared to a normal rate of 10 to 11 percent.

The southeastern Wisconsin office market has also shown improvement, but still remains above 19 percent, according to Xceligent.

More office space tenants in the U.S. seem to be cramming employees into smaller spaces to avoid the expense of having to increase their footprint, Yun said. High tech tools that allow more workers to telecommute have also reduced the need for office space, he said.

Continued improvements in the overall economy should lead to more improvements in the commercial real estate market in 2015, Yun said.

The prices of commercial real estate sales should remain stagnant, Yun said. Federal monetary policy has already inflated commercial real estate values and interest rates should creep up next year, which will be a headwind for real estate values, he said.

But as job growth continues and vacancy rates continue to decline, commercial real estate rental rates should increase, he said.

Rising occupancy rates could also lead to more commercial real estate development.

“New construction activity has been subdued for the past five years,” Yun said. “The reason is that vacancy rates are too high and tenants can make use of existing spaces. As we see future employment expansion, which I anticipate, we will see more development.”

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