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Commercial Property Declines Easing

Friday, December 18, 2009

Declines across the nation's commercial real estate sectors are easing slightly as 2010 approaches, a new study shows.

Despite the positive signs, however, growth across the commercial property markets is expected to remain sluggish through at least the first quarter of 2010, followed by a potentially meaningful recovery during the second half of the year.

Those are among the conclusions in the latest edition of the Investment Trends Quarterly report, produced jointly by the CCIM Institute and Real Estate Research Corporation (RERC).

Richard Juge, CCIM, the 2010 president of the CCIM Institute, acknowledged the “stress” and “distress” of 2009. "However,” he added, “we also see signs of improvement, and while the path ahead is rocky and will be difficult to navigate for many, it also provides some extraordinary buying and leasing opportunities.”

Overall, the report notes several key trends:

• Transaction volume is increasing on a quarter-to-quarter basis for some property types, although it is still declining overall on a 12-month trailing basis.

• Third-quarter 2009 volume increases are reported in the office, retail, apartment and hotel sectors.

• Industrial sector volume was the only property type to see quarter-to-quarter volume decline.

In addition, while 12-month trailing prices declined slightly across the board during the third quarter, the report notes that pricing is beginning to inch up for several property types on a quarter-to-quarter basis.

Apartments Faring Best

The Investment Trends Quarterly captures market-specific data to determine the relative health of each of the major commercial property sectors, using a 1 to 10 rating system to grade current investment conditions, with 10 at the high end of the scale.

During the third quarter, apartments fared the best among commercial property types with a 5.5 rating, which was up from the second quarter. Industrial ranked second among survey respondents with a 4.3 rating. This was unchanged from the previous quarter.

The retail and office sectors tied in the third quarter with a rating of 3.8. For retail, the rating was up from 3.4 in the second quarter, while the office sector also increased from 3.5 during the same period. The hotel sector ranked at the bottom of the survey with a 3.6 rating, but this was an improvement over the 3.4 rating in the second quarter.

Looking Ahead: 2010

Here are a few trends to watch as the industry enters 2010:

• Credit will remain tight.

• Bank foreclosures will increase as more commercial loans come due.

• Consumer spending is expected to remain relatively sluggish, despite the upcoming holiday season.

• Vacancy rates for all major commercial real estate sectors will continue to increase throughout most of 2010.

• Capitalization rates will move slightly.

• Commercial property sale prices and rents will remain mostly flat or decline further.

• Commercial real estate construction will remain slow.

• Sales volume and transactions will begin to increase.

• More entrepreneurs and opportunistic funds will be looking more closely at real estate.