The National Association of Realtors (NAR) recently released its annual outlook for commercial real estate. The joint report, titled “Expectations & Market Realities in Real Estate 2013—Turn the Page,” reveals that after the Great Recession ended in June 2009, the commercial sector has been on a steady track towards recovery since stabilizing in 2011.

Although the residential housing market is on a road to recovery, the larger economy continues to struggle. Nonetheless, historically low interest rates and a recovering stock market have played key roles in the improved commercial real estate market.

In 2012, the commercial market “matured” as multi-family apartments, shopping malls, and office buildings made consistent returns.

Expectations for the U.S. economy

Concerns about the national debt, European Union debt crisis, and weak economic growth both in the U.S. and around the globe continue to create “uncertainty” surrounding the commercial real estate sector.

According to the report, commercial real estate investors should expect only a modest improvement in the economy for 2013. This is due mainly to uncertainty regarding the federal budget deficit, tax increases and cuts in government spending mandated by the budget control act of 2011.

Despite these factors, the prognosis calls for domestic economic expansion to continue at a slow pace—with moderate growth for the next few years and employers cautious about padding their payrolls.

Employment outlook

Jobs remain the key driver for the commercial real estate sector, just as they have been for the rest of the economy. When more Americans have jobs, demand increases for commercial real estate space just like it does for consumer goods. Why is this significant? Consumer spending represents 70 % of the Gross Domestic Product.

Since early 2010,  when unemployment reached a low point, companies have added 4.3 million new jobs. The authors of the report expect the pace of business hiring to increase as companies absorb the impact of tax increases.

Commercial lending

Stronger investor demand, better fundamentals and enhanced commercial loan portfolio performance comprise the list of key drivers for commercial real estate lending.  In 2012, lenders (led by insurance companies and government agencies Fannie Mae and Freddie Mac) relaxed credit underwriting standards and completed more loan originations for commercial properties. Retail properties accounted for 56% of loan originations, on a year-over-year basis, through the second quarter of 2012.

For small commercial real estate investors, the NAR states that “tight lending” remains an issue and adds a caveat that all projections contained in its report hinge upon “continued and/or increasing credit availability.”

Vacancy rates and rent increases

• Office sector: Nationwide, the vacancy rate for office space declined from an estimated 16 percent (Q1 2012) to 15.6 percent (Q1 2014). Washington, D.C. recorded the lowest vacancy rate at 9.4 percent.  After a 2.0 percent rise in 2012, rents should increase by 2 percent in 2013 and 2.8 next year.
• Industrial sector: Expect the vacancy rate for industrial property to decline from 9.6 percent (Q1 2013) to 9.2 percent (Q1 2014). Rents should increase 2.3 percent this year and 2.6 percent in 2014.
• Retail sector: Heightened demand for retail space will drop the vacancy rate from 10.7 percent (Q1 2013) to 10.4 percent for the same period next year. Rents will climb an average 1.5 percent this year and 0.8 percent in 2014
• Multifamily sector: The multifamily apartment rental market remains a “landlord’s market”.  This refers to a rental market environment that has vacancy rates under 5 percent. In 2013, vacancy rates will slide to 4.0 percent in the first quarter and 3.9 percent in Q1 2014.

In 2012, rents increased an average of 4.1 percent.  NAR anticipates an increase of 4.6 percent in 2013 and 4.7 percent in 2014.

All in all, the outlook throughout the U.S. for 2013 is one of cautious optimism. Here in the Annapolis/Baltimore corridor, the pictures is no different. To learn more, and to obtain a complete copy of the NAR report, click here.