Future of commercial real estate appears promising

The commercial real estate market has been unstable ever since the housing market collapse, but as the economy builds momentum, a number of reports say the future looks promising.

The commercial real estate market has been unstable ever since the housing market collapse, but as the economy builds momentum, a number of reports say the future looks promising.

According to a recent study conducted by Keefe, Bruyette & Woods, the overall commercial vacancy rate declined during the first quarter this year. It was noted that areas with significant economic improvements, such as job market stability, led the way.  

"Not surprisingly, better job growth is a common theme for better-performing markets," the report said. "When compared to 4Q of 2011, Baltimore and Seattle had the most overall significant improvements in rankings, while Dallas and San Bernardino/Riverside reported the most deterioration in expected future real estate fundamentals."

Some local markets slow to show improvement

Meanwhile, during the first quarter, the report shows that the top commercial real estate markets, based on vacancy rates, included Austin, Houston and San Francisco. In contrast, real estate data shows that Cleveland, Chicago, Detroit, Los Angeles and Philadelphia ranked among the worst. But as the economy gains momentum, vacancy rates in all of these areas are expected to show improvement in the near future.

Industry professionals predict that local commercial markets that resort to key business fundamentals will stage the quickest and most profound comebacks. Specifically, the National Association of Realtors said in a recent forecast that the apartment rental sector will be a front-runner in the sector's recovery.     

"Ongoing job creation, which is at a higher level this year, is fueling an underlying demand for commercial real estate space, assisted by a steady increase in consumer spending," said NAR chief economist Lawrence Yun. "The pattern shows gradually declining commercial vacancy rates, with consequential but generally modest rent growth."

Job creation could be a major factor

Meanwhile, the economy is expected to add between 2 million and 2.5 million employment positions both this year and in 2013, Yun added. The multifamily housing market could be a leader in job creations, as real estate developers continue to find the financial safety and soundness needed to break ground on a greater number of projects.

However, the report noted that the transactions rate on commercial properties valued below $2.5 million will continue to be an obstacle in the way of the sector's recovery. Currently, there is very little capital available for small business to invest in spaces valued below this price point. In addition, strict lending standards have made it difficult for small investors to obtain commercial real estate with low price points.



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