Lessons from the Pros

Real Estate

An Update on Commercial Real Estate and Its Segments

On Power Trading Radio last week we talked about the commercial real estate market, its makeup and some of the current trends.

The commercial real estate market is more segmented than the residential market. Let’s look at each market segment and its specific market conditions.

Office Market: According to the Office Outlook Report, created by Jones Lang LaSalle for Q2 2012, “…national absorption levels jumped back to 2010 and 2011 quarterly averages with the amount of occupied space increasing by 9.2 million square feet in the second quarter.”  The recovery that is being experienced in this market is exclusively driven by a few geographic areas; the west coast and tech industries (account for more that 55 percent of the absorption gains). Texas (Dallas, Houston and Austin) and Denver are showing big gains as well.

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Industrial Market:

Small buildings nationwide have seen increases in 2012 to the highest level since 2008.

Lawrence Yun, chief economist for the National Association of Realtors (NAR) said “Industrial and warehouse space is holding on better because imports and exports have advanced. While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner – Canada.”

There is an expectation that annual industrial rent will increase to 1.7 percent in 2012 and 2.4 percent in 2013.

Vacancy rates are forecast to decline slightly, and the net absorption of space is seen at 59.8 million square feet in 2012 and 67.2 million in 2013.

Retail:   Brick and mortar retail stores aren’t going anywhere, in fact experts see the role of those stores changing.  “Many retail executives believe that the role of the physical space is shifting from a transactional model to an experiential one, in which customers have a personalized experience with the brand.” says Henry Englehardt, CCIM, a senior vice president at Colliers International in Walnut Creek, Calif.

The other thing that is breathing life into retail space, are mom and pop organizations. People who are retired or been laid off are now opening stores. There is a big trend to lease space in the older downtown areas where mom and pops can get short-term leases.

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Retail vacancy rates are projected to decline from 10.9 percent in the third quarter this year to 10.7 percent in the third quarter of 2013.

Multifamily: In the second quarter of 2012 the apartment and condo market reached the highest levels since the same quarter in 2005 (according to NAHB – National Association of Home Builders).  This marks eight consecutive months for continued growth in the multifamily sector.

“The strength of the MPI (Multifamily Production Index) suggests that multifamily production is likely to increase somewhat going forward,” says NAHB Chief Economist David Crowe. “Multifamily production has already recovered substantially from a historic low of about 110,000 starts a year in 2009 and 2010 to the current annual rate of a little over 200,000. However, prior to the downturn multifamily starts remained about 300,000 per year for 12 consecutive years, so there is room for further improvement before apartment and condo production return to normal, sustainable levels.”


In looking for data about this sector of the industry I ran across the Cornell University School of Hotel Administration and the Indices it has created to track real estate prices in the hospitality sector.

The Cornell Hotel Indices shows that a corner is being turned on both large ($10 million or above) and small (under $10 million) properties.  The Indices show that prices for large hotel transactions started its recovery several quarters ago and have started to slow a little.  The big news in this quarter is that small hotels have also shown price increases.

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Great Fortune

Diana Hill


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

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