Week of July 23, 2001
  Snapshot from the Field
NAR Report:
'General Balance' Could Mean 'Positive Growth' Later for 'Cooling' U.S. Markets
By JACK LYNESite Selection Executive Editor of Interactive Publishing

DenverWASHINGTON, D.C. -- Slowing but still positive: That's the take on the U.S. commercial real estate market from the National Assn. of Realtors' (NAR at www.nar.realtor.com) new Commercial Real Estate Quarterly.
        Covering the commercial market's first-quarter 2001 performance, NAR's report documented rising vacancy rates in the office, warehouse, multifamily and lodging sectors. Somewhat surprisingly, it recorded a slight retail vacancy drop in the 54 markets tracked. Still, NAR researchers noted that Q1 2001's net retail absorption of 16 million sq. ft. (1.4 million sq. m.) marked "the lowest level in nearly six years."

'Commercial Real Estate Quarterly' forecast that Denver would be 2001's hottest retail market.

        "We're seeing a cooling in most of the commercial markets that has been tracking the slowdown in the U.S. economy," said David Lereah, NAR's chief economist. "At the same time," Lereah added, "there's a general balance in commercial real estate, which means more positive growth can be expected as the economy improves later this year."
        How positive things are right now, though, depends to great extent on which part of the real estate industry provides your daily bread. And it also depends on the markets in which you're operating. And keep in mind that NAR's report preceded Alan Greenspan's less-than-upbeat utterances this week.
        Here's a look at the five sectors the report covered, including its predictions for 2001's five hottest markets in each.

MiamiThe downturn's hard hit on office employment contributed substantially to space absorption of only 8 million sq. ft. (720,000 sq. m.). Q1 2001 office employment dropped by 67,000 jobs in the 54 tracked markets, "mostly in temporary jobs," NAR found, triggering "a massive increase of sublease space."
        Commercial Real Estate Quarterly found some office job growth, but not enough to offset the axed jobs. "Combined with a high volume of new supply, the vacancy rate rose to 10.4 percent in the first quarter - half of a percentage point higher than the fourth quarter of 2000," the report noted.

The NAR report predicted that Miami would be 2001's hottest office market, "based on rent growth."

        The trend was much kinder to office tenants, with inflation-adjusted rents rising only 0.9 percent from Q4 2000. Still, that was 7.5 percent above Q1 2000. Q1 2001 office construction, the report found, slowed to 48 million sq. ft. (4.3 million sq. m.), a 26 percent drop from Q4 2000.
        NAR predicted "modest office demand growth in 2001," with net absorption of 46 million sq. ft. (4.1 million sq. m.). With 150 million sq. ft. (13.5 million sq. m.) of new space coming on-line this year, the report projected vacancy rates rising to 11.6 percent by 2001's end, well above year-end 2000's near-record low of 9.9 percent. "Inflation-adjusted rents will grow at a more sustainable pace of 2.6 percent by year-end," NAR predicted.
        The report predicted that 2001's hottest office markets, "based on rent growth," would be, respectively, Miami; San Diego; Palm Beach County, Fla.; Long Island, N.Y.; and San Jose, Calif.


Q1 2001's net warehouse absorption of 27 million sq. ft. (2.4 million sq. m.) marked a 29 percent reduction from Q4 2000. Q1 2001's 36 million sq. ft. (3.2 million sq. m.) of completed new warehouse space marked a drop of 10 percent from Q4 2000. And Q1 2001's 34 million sq. ft. (3.1 million sq. m.) of new warehouse space construction starts marked a 23 percent drop from Q4 2000.
        Warehouse demand will "level out in the third quarter and rise in the fourth quarter as manufacturers align their capacity with demand," NAR projected. 2001's net warehouse absorption should total only 86 million sq. ft. (7.7 million sq. m.), a whopping 45 percent drop-off from 2000. Now at 7.3 percent, 2001's warehouse vacancy rate will rise to 7.9 percent, NRA predicted, with inflation-adjusted rents rising only 1.5 percent.
        The report's predictions for 2001's respective hottest warehouse markets were, respectively, Orange Country, Calif.; Los Angeles; San Jose; Riverside, Calif.; and San Francisco.


Q1 2001 net retail absorption of 16 million sq. ft. (1.4 million sq. m.) marked a tepid 2.7 percent rise. But with 32 million sq. ft. (2.9 million sq. m.) in net new retail space completions, the vacancy rate dropped to 9.2 percent, down from Q1 2000's 9.4 percent. Inflation-adjusted rents were 2.3 percent above Q1 2000, while retail construction starts of 42 million sq. ft. (3.8 million sq. m.) were 5 percent above the level of a year ago.
        NAR predicted a "slowing of net [retail] absorption through the fourth quarter, with total absorption this year at 43 million sq. ft. (3.9 million sq. m.)." It predicted a retail vacancy rise to 10.3 percent by year's end in the 54 tracked markets, with 2001's inflation-adjusted rents rising by 1.7 percent.
        2001's predicted hottest retail markets were, respectively, Denver; East Bay, Calif.; San Jose, Calif.; Kansas City; and Los Angeles.


The multifamily sector turned in Q1 2001's most robust performance, NAR reported. Commented Lereah, "The multifamily market for rental apartments is [the] strongest . . . sector." But while net absorption totaled nearly 43,300 units, new rental unit completions totaled 53,100 units. That pushed the vacancy rate to 5.1 percent, 0.1 percent above Q4 2000. Inflation-adjusted rents rose 4.6 percent, but the 53,700 units of new construction marked a 13 percent drop from Q4 2000.
        NAR projects construction of some 205,000 rental units during 2001. That should raise 2001's total apartment stock by 1.7 percent in the 54 tracked markets, with a 1.3 percent absorption rate. With sector vacancy rates rising to 5.3 percent by year's end, 2001's inflation-adjusted rents will rise by 3 percent.
        The report's predictions for 2001's hottest multifamily markets: San Jose; Austin, Texas; Minneapolis, San Diego and Northern New Jersey.


The lodging sector felt the travel-budget pinch, with Q1 2001's 2.6 percent demand roughly half of Q4 2000's. The 59.1 percent room occupancy rate marked a slight rise from the 59.3 percent rate of a year ago.
        NAR predicted "continued weakness in the lodging market, but a general economic recovery in the second half of the year should help to bolster the sector. Lodging demand increases are expected to trail supply growth." Said Lereah, "The lodging market's growth is expected to be slightly less than the general rate of inflation."
        The predictions for 2001's respective hottest lodging markets: Riverside, Calif.; Los Angeles; San Francisco; Atlanta; and New York.

sf0723sf0723 ©2001 Conway Data, Inc. All rights reserved. Data is from many sources and is not warranted to be accurate or current.