Commercial Real Estate


Commercial Real Estate Leasing and Buying Trends for 2011

Demand for commercial properties in the United States has begun to show strong positive signs of recovery, including strong leasing activity, declining vacancy rates and very low new construction. In addition, recent economic forecasts predict that the U.S. economy is poised to expand at the fastest rate since 2003, spurred by retail spending, corporate profits and a rebound on Wall Street.

The one key element missing has been job growth. However, unemployment has begun to decline, and an expected rise in employment by the end of 2011 will give a much-needed boost to commercial real estate. Though modest, these positive economic trends are expected to bring lower vacancy rates of commercial properties such as office space, industrial, and retail spaces.

What do these real estate and economic indicators mean for those who are in the market to lease or buy commercial property? Quite simply, it means this is a transition year providing a unique opportunity to lease space and buy property and lower than average rents and prices.

Vacancy rates, while still quite high, have begun to come down. Commercial property rents, which fell for much of 2009 and 2010, have stabilized and even begun to increase in some markets. The window for leasing space at today's lower rates and buying commercial property and today's lower prices is open but in many markets it is beginning to close.

Because of lower rental rates available in the market today, firms can afford to 'trade up' and lease space in higher quality buildings or at better locations than they could afford before the recession. Many firms are taking their real estate broker's advice and leasing space at the lower rental rates prevalent today.

CoStar Group, a commercial real estate research firm based in Washington, DC, has confirmed that leasing activity has increased dramatically in the office market. During the fourth quarter of 2010, for example, CoStar reported that 21 million square feet of office space was absorbed (leased and taken off the market by tenants). That was triple the amount of space absorbed in the third quarter of 2010.

As more companies take advantage of the available low rental rates and lease more space, the amount of available space will continue to decline. And with construction of commercial property at an all-time low right now, very little new space is being added to the market.

The laws of supply and demand will govern the commercial property markets just as they always have. As leasing activity continues, the amount of vacant or available space will become limited and rents will begin to increase. The window of opportunity currently available in the market will close until the next down cycle.

A similar window of opportunity exists this year for prospective buyers of commercial property. Prices for all but the largest and most expensive commercial buildings have continued to decline. Together with the historically low interest rates available in the market, the lower prices on for-sale property have made commercial property more affordable than it has been in years.

In addition, many of those who took out loans to buy commercial property before the recession may have mortgages that are "under water," that is they owe more than the current value of their commercial property and are highly motivated to sell.

Just as in the commercial leasing market, the current opportunities in the commercial property sales market won't last long. When rental rates begin to increase, the value of their properties also increases.

Keep an eye on vacancy rates as the measure of supply and demand in commercial property markets. When vacancy rates are high, available space is plentiful and rents and property values go down. When vacancy rates are falling or very low, available space is tight and rents and property values increase.

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