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Commercial real estate fundamentals improving; lending tight for small business

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From page HS5 | June 14, 2013 |

WASHINGTON, D.C. — With vacancy rates modestly falling and rents moderately rising in commercial real estate sectors, market fundamentals have improved, but financing remains a challenge for small business, according to the National Association of Realtors quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, said the market is showing an uneven recovery. “The wheels appear to be greased for the big players, but not so much for small business,” he said. “Overall, the commercial sectors are firming nicely, with multifamily continuing to show the best performance.”

National vacancy rates over the coming year are expected to decline 0.1 percentage point in the office market, 0.5 point in industrial, and 0.3 point for retail; however, the average multifamily vacancy rate is forecast to rise 0.2 percentage point, with that sector still showing the tightest availability and biggest rent increases.

A companion report, the Commercial Real Estate 2013 Lending Survey,1 shows widely varying availability of lending capital depending on property size, with a significant disadvantage for buyers of smaller properties.

Commercial sales volume of major properties valued at $2.5 million and above increased 24 percent in 2012 to $294 billion. The uptrend continued during the first quarter of 2013, with a $72.8 billion volume that is 35 percent above the first quarter of 2012. Sixteen markets in the first quarter experienced triple digit gains.

Commercial mortgage-backed securities regained market share in 2012, accounting for 22 percent of lending for major commercial properties. A comparable source was government agencies, followed by national banks, insurance companies and regional banks.

Realtor commercial members report 85 percent of their clients’ transactions are for purchases under $2 million — generally small businesses. These transactions are financed largely by private investors, along with local and regional banks, marking a bifurcation in capital availability based on property value.

“Despite the improvement for major commercial properties, 52 percent of Realtors report they had a commercial transaction fail in the past year due to a lack of financing,” Yun said. “In addition, 42 percent of respondents said clients failed to complete a refinancing. Credit for small business remains unnecessarily tight.”

Commercial members report that new and proposed U.S. legislative and regulatory initiatives, and regulatory uncertainty for financial institutions, account for the lack of capital in commercial lending for smaller properties.

NAR’s latest Commercial Real Estate Outlook2 offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc.,3 a source of commercial real estate performance information.

Office markets

Vacancy rates in the office sector should decline from a projected 15.7 percent in the second quarter to 15.6 percent in the second quarter of 2014.

The markets with the lowest office vacancy rates presently (in the second quarter) are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 9.9 percent; Little Rock, Ark., 12.0 percent; and Birmingham, Ala., 12.3 percent.

Office rents are likely to increase 2.6 percent this year and 2.8 percent in 2014. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, will probably total 31.7 million square feet this year and 42.0 million in 2014.

Industrial markets

Industrial vacancy rates are expected to slide from 9.4 percent in the second quarter of this year to 8.9 percent in the second quarter of 2014.

The areas with the lowest industrial vacancy rates currently are Orange County, with a vacancy rate of 3.9 percent; Los Angeles, 4.1 percent; Miami, 5.8 percent; and Seattle at 6.3 percent.

Annual industrial rents are seen to rise 2.4 percent this year and 2.6 percent in 2014. Net absorption of industrial space nationally is forecast to total 107.1 million square feet in 2013 and 100.3 million next year.

Retail markets

Retail vacancy rates are estimated to ease from 10.5 percent in the second quarter of this year to 10.2 percent in the second quarter of 2014.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.6 percent; Fairfield County, Conn., at 4.1 percent; and Long Island, N.Y., and Orange County, each at 5.3 percent.

Average retail rents are projected to rise 1.4 percent in 2013 and 2.2 percent next year. Net absorption of retail space is anticipated to be 12.5 million square feet in 2013 and 17.4 million next year.

Multifamily markets

The apartment rental market – multifamily housing – should see vacancy rates edge up from 3.9 percent in the second quarter to 4.1 percent in the second quarter of 2014; vacancy rates at less than 5 percent are described as a landlord’s market, with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.0 percent; New York City, 2.2 percent; and Minneapolis and San Diego, each at 2.3 percent.

Average apartment rents are likely to increase 4.6 percent this year and another 4.6 percent in 2014. Multifamily net absorption is expected to total 276,300 units in 2013 and 243,800 next year.

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