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NAR: Commercial Real Estate Market on Uptrack With Lower Vacancies


WASHINGTON, June 14 -- The commercial real estate market is improving as vacancy rates decline and rents firm up in all four commercial market sectors, according to the National Association of Realtors(r) (NAR) COMMERCIAL REAL ESTATE SPOTLIGHT.

David Lereah, NAR’s chief economist, said solid gains are forecast for commercial real estate through 2006. “Even with a lot of new construction around the country, we are seeing healthy levels of commercial real estate space being purchased, rented and occupied,” he said. “As a result, vacancies are declining across the board – this is improving the fundamentals for commercial real estate sectors into the foreseeable future.”

NAR President Al Mansell, CEO of Coldwell Banker Residential Brokerage in Salt Lake City, said employment growth and retail spending are stimulating the commercial market. “In simple terms, new jobs mean a greater demand for work space, and strong consumer spending increases the need for transporting, warehousing and retailing of goods and products,” he said. “As such, investing in commercial real estate is attractive with a continued inflow of capital, both domestic and foreign.”

The NAR forecast for four major commercial sectors is based on analysis of data in 57 metro areas tracked, including the office, retail, industrial and multifamily markets. The forecast was produced with data provided by Torto Wheaton Research and Real Capital Analytics.

In the office sector, growing employment has resulted in more demand for space. Office vacancy rates should decline to 14.1 percent by the fourth quarter of this year and 12.2 percent by the end of 2006, down from 15.4 percent last year. Office rents are forecast to grow 4.4 percent in 2005 and 4.9 percent next year, after rising only 0.4 percent in 2004. Areas with the lowest office vacancies currently include Ventura County, Calif.; Orange County, Calif.; Las Vegas; New York City; and Long Island, N.Y., all with vacancy rates of 9.2 percent or less.

Net absorption of office space in the 57 markets tracked, which includes the leasing of new space coming on the market as well as space in existing properties, is projected at 77.8 million square feet in 2005 and 72.1 million next year, compared with 77.7 million in 2004 and only 20.0 million square feet absorbed in 2003.

Over the last year, there has been almost $100 billion in office transactions. The top metro markets for investment are New York City, Los Angeles, Washington, San Francisco and Chicago. The industrial sector also is benefiting from employment growth, as well as strong activity in port markets. Vacancy rates are expected to decline 9.9 percent by the end of 2005 and 8.8 percent by the fourth quarter of next year, down from 10.9 percent in 2004. Industrial rents, which slipped 0.6 percent last year, should rise 1.7 percent this year and 2.5 percent in 2006.

The areas with the lowest industrial vacancies are West Palm Beach, Fla.; Los Angeles; Orange County, Calif.; Long Island, N.Y.; and Riverside, Calif., all with vacancy rates of 6.9 percent or less.

Net absorption of industrial space in the 57 markets tracked is forecast at 198.1 million square feet this year, and 219.1 million in 2006, up from 176.5 million last year and only 16.5 million square feet absorbed in 2003. Five key markets in Southern California, which are either seaports or distribution hubs, are expected to account for one-fifth of all industrial space that will be absorbed during the current quarter.

Nearly $27 billion in industrial transactions were recorded in the last year. The top markets for investment are Los Angeles, Chicago, New York City, San Francisco and San Diego. In the retail sector, strong consumer spending has provided a stable background. The vacancy rate is projected to drop to 6.8 percent in the fourth quarter of this year and 6.9 percent by the end of 2006, compared with 7.5 percent last year. Rent growth, forecast at 3.2 percent in both 2005 and 2006, was 3.3 percent in 2004.

Retail markets with the lowest vacancies include Nashville, Tenn.; Las Vegas; Oakland, Calif.; Washington; and Honolulu, with vacancy rates of 3.2 percent or less. Net absorption of retail space in the 57 markets tracked is estimated at 34.0 million square feet in 2005 and 27.3 million next year, up from 27.1 million in 2004.

The top markets for retail investment are Los Angeles, Washington, New York City, Chicago and South Florida.

The apartment rental market – multifamily housing – can expect vacancy rates to drop to 5.7 percent by the end of 2005 and 5.2 percent in the fourth quarter next year, down from 6.2 percent in 2004. Average rent is forecast to rise 2.5 percent this year and 2.7 percent in 2006, following a 1.5 percent rise in 2004. Areas with the lowest apartment vacancies are Norfolk, Va.; Washington; Los Angeles; Miami; and Riverside, Calif., with vacancy rates of 3.0 percent or less.

Multifamily net absorption is projected at 259,300 units in 57 metro areas tracked in 2005 and 259,600 next year, compared with 264,300 last year and well above the 159,400 units absorbed in 2003. The top markets for multifamily investment are Los Angeles, New York City, South Florida, Washington and San Diego.

Conversion of apartments into condominiums is influencing the dynamics of multifamily investment nationally, with transaction volume for conversions rising 360 percent over the last year. In South Florida, Washington and San Diego, converters have been the largest group buyer.

A fifth commercial sector, hospitality, is experiencing a new trend with hotel properties also being converted into condos. Some analysis has shown that selling a hotel to a condo converter, rather than another hotel operator, can almost double the sales price.

The COMMERCIAL REAL ESTATE SPOTLIGHT is published by the NAR Research Division for the Realtors(r) Commercial Alliance (RCA). The RCA, formed by NAR in 1999, serves the needs of the commercial market and the commercial constituency within NAR, including commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and NAR affiliate organizations. Those organizations include the CCIM Institute, the Institute of Real Estate Management, the Realtors(r) Land Institute, the Society of Industrial and Office Realtors(r), and the Counselors of Real Estate. The RCA also provides commercial products and services.


NOTE: The next commercial real estate market forecast is scheduled for Sept. 13.


The National Association of Realtors(r), “The Voice for Real Estate,” is America’s largest trade association, representing more than one million members involved in all aspects of the residential and commercial real estate industries.

Information about NAR is available at This and other news releases are posted in the Web site’s “News Media” section in the NAR Media Center. Statistical data, charts and surveys also may be found in the NAR Media Center by clicking on Economic & Housing Statistics. REALTOR(r) is a registered collective membership mark which may be used only by real estate professionals who are members of the NATIONAL ASSOCIATION OF REALTORS(r) and subscribe to its strict Code of Ethics.


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