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Credit Still Hurts Commercial; 2011 Looks Brighter

 By Robert Freedman, senior editor, REALTOR® Magazine

Commercial economic update

Lack of financing will continue to hamper commercial real estate transactions going into 2011 but there are some positive signs on the horizon, NAR Chief Economist Lawrence Yun told REALTORS® last week at the NAR Conference & Expo in New Orleans.

Right now there is a lack of buyers for commercial properties in all sectors but that’s a function of the tight lending environment, not of a lack of interest in deals, he said. With cap rates on properties in the different sectors averaging about 9 percent, there will be no shortage of buyers once lenders start easing credit availability, he said.

Yun thinks that could happen as soon as next year, because lenders are sitting on plenty of cash from strong profits and pressure could be building for them to start deploying that cash. At some point, he said “they must get back into the business for which they were created, and that’s making loans.”

Separately, Hugh Kelly of the University of New York said later in the same session at which Yun spoke that the commercial mortgage-backed securities (CMBS) market is making a small but steady comeback, and appeared poised to reach a significant amount soon, suggesting a growing appetite among investors for higher-yield investments.  “Investors want to get back into riskier investments,” he said.

Yun said if buyer activity does pick up, commercial prices stand to rise, which will lower cap rates, but the rates will remain far above Treasury bonds and stay attractive to investors.

Of the major commercial sectors, multifamily is showing the strongest fundamentals. It’s benefiting from the slack in home sales and is the one sector that could see a drop in vacancy rates in 2011, Yun said. Based on data from major metro markets NAR tracks, NAR is forecasting net absorption of units to increase to almost 140,000 from about 120,000 and vacancies to ease to about 5.5 percent from about 6 percent in mid-2010. Rental rates will stay about the same.

In the other sectors, vacancies are expected to remain elevated and rental rates to keep slipping, but there are some bright spots. In the office sector, absorption is expected to move into positive territory, to some 20 million square feet, up from a negative absorption this year. But that won’t translate into improvements in vacancies or rental rates. Vacancies are expected to continue rising, at least slightly, to about 17 percent, and rental rates will drop by about 2 percent.

Net absorption among industrial properties is expected to move out of negative and into positive territory, to about 160 million square feet, and vacancies are expected to ease, to under 14 percent. Rental rates will continue dropping.

In the retail sector, net absorption is also expected to turn positive, to something over 6 million square feet, and vacancies will hold steady.

Against this backdrop, commercial real estate could start to show a sustained recovery in another 12 to 18 months, sad Yun.

Access data slides from Yun’s presentation.  

Robert Freedman

Robert Freedman is director of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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