Southern California Industrial Real Estate Blog

Respectable job growth, improving fundamentals, favorable interest rates and limited speculative construction suggest strong investor appetite will continue in 2007, according to a commercial market update and forecast presented here at the National Association of Realtors® Midyear Legislative Meetings & Trade Expo.

Investment in commercial real estate rose 11 percent to a record $306.8 billion in investment-grade transactions in 2006, with office buildings leading the way.  Institutional investors continue to pour funds into commercial real estate, commercial lending volume is up and delinquencies remain relatively low.

Lawrence Yun, NAR senior economist, said fundamentals have firmed in most sectors.  “Over the past year, 2 million jobs have been created, and unemployment has been hovering at or below the natural rate of about 5 percent, supporting the office sector in particular,” he said.  “The office market is the sector of choice, but growing international trade is strengthening the demand for warehouse and distribution facilities.

“With these positive fundamentals and strong spending so far this year, we expect the appetite for commercial investment to remain historically high in 2007,’ Yun said.

U.S. exports have been rising solidly, and business spending for building construction is rising at double-digit rates - boosted by record corporate profits.  Much of the new commercial construction currently is build-to-suit, or with a lead tenant.

On the downside, construction costs are rising due to global economic expansion, and pressures on core inflation are worrisome.  Retail demand is decelerating and the economy is slowing.  “Residential construction has become a drag on the economy, resulting in sub-par economic growth,” Yun said.  “Because commercial sectors follow the economy, commercial markets are in a process of normalizing.”

The NAR forecast for major commercial sectors includes analysis of quarterly data for various tracked metro areas.  The sectors include the office, industrial, retail and multifamily markets.  Metro data were provided by Torto Wheaton Research and Real Capital Analytics.

Industrial Market 
New state-of-the-art facilities are being built, increasing the availability of older structures in some markets.  The West and Midwest are the most active for industrial property investment, with overall sales volume running 10 percent higher than the same time last year.

“The inventory-to-sales ratio in the retail sector is low, with a similar situation in wholesale inventory, so there is a need to restock - that means there also is a need for more space,” Yun said.  “In addition, orders for durable goods have been rising.”

Net absorption of industrial space in 54 markets tracked is expected to be 197 million square feet between the second quarter of 2006 and the second quarter of this year.  The total for 2007 is likely in the range of 75 million to 80 million square feet.

Markets near major ports have the lowest vacancies, including Los Angeles; West Palm Beach, Fla.; and Long Beach, Calif., with vacancy rates of 5.0 percent or less.  Industrial vacancy rates nationally are projected to drop to 9.8 percent in the second quarter from 10.3 percent in the same period in 2006, and forecast at 10.0 to 10.5 percent by the end of 2007.  Annual rent growth will be 2.0 to 2.5 percent by the end of this year.

The National Association of Realtors®, “The Voice for Real Estate,” is Americas largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

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The next commercial real estate market forecast was held June 13.