October 2, 2007 By Alton Gary Simpson

WASHINGTON-Despite concerns about tightening credit, most U.S. commercial real estate markets are enjoying low vacancy rates and healthy rent growth from a fundamentally sound economy, according to the National Association of Realtors. The NAR Commercial Real Estate Outlook notes that a record $257 billion was invested in commercial real estate in the first seven months of this year, a 75% increase from $146.7 billion during the same period in 2006.

Cindy Chandler, chair of the Realtors Commercial Alliance, said there have been some problems recently regarding the availability of capital. "Over-reaction to credit concerns in the financial markets could limit the availability of capital needed by private investors, but overall the situation does not appear to have significantly impacted institutional-grade commercial properties.

"We’re returning to the fundamentals and deal structuring of the mid 90s, and may see some dampening in investment activity, but there is a lot of momentum in commercial real estate. We see the commercial sectors holding at a healthy level of activity in most of the country, although there could be some slowing as a result of postponed transactions and delays in decision making."

The NAR Commercial Outlook notes that anecdotally, multifamily housing appears to be impacted by an influx of single-family homes being offered for rent, cutting into the demand for apartment rentals. In addition, condos are being converted into rental units, in markets such as the city of Washington and several areas of Florida. Concurrently, potential first-time homebuyers are staying in the rental market, supporting multifamily fundamentals until the housing cycle changes and more buyers enter the housing market.

According to the report, multifamily vacancy rates are likely to average 5.9% in the fourth quarter of 2007, the same as the fourth quarter last year, and then ease to 5.6% by the end of 2008. Average rent is expected to rise 2.9% this year and 3.8% in 2008, after last year’s 4.1% increase. The areas with the lowest apartment vacancies include Northern New Jersey, Salt Lake City, Philadelphia, Pittsburgh, Los Angeles, Minneapolis and Nashville, Tenn. all with vacancy rates of 2.7% or less. Multifamily transactions in the first seven months of this year totaled $46.3 billion, compared with $41.5 billion in the same period in 2006. Half of the purchases were by private investors, while condo converters accounted for only 3% of acquisitions.

Noting that the office sector is the most favored by investors and showing strong rent growth this year, the NAR Commercial Real Estate Outlook states that demand for space is expected to remain strong next year. The areas with lowest office vacancies include New York City; Ventura County, Calif.; Seattle; Los Angeles; Honolulu; and Long Island, N.Y., all with vacancy rates of 9.4% or less. The volume of office building transactions during the first seven months of this year reached a record $147 billion, 53% higher than the same period in 2006. Equity funds accounted for 43% of office building purchases followed by private investors at 21%.

High levels of new supply are holding back recovery in the retail market. Most of the new space on the market is in non-regional malls. New available space is expected to see marked declines next year. The report states that credit problems have not impacted retail sales yet, but is being monitored. The retail markets with the lowest vacancies include San Francisco; Orange County, Calif.; San Jose, Calif.; Ventura County, Calif.; Washington; and Las Vegas, all with vacancy rates of 5.1% or less. Retail transaction volume in the first seven months of this year totaled $37.4 billion, up from $22.3 billion last year. Private investors accounted for 35% of transaction volume, followed by institutional investors at 22% and foreign investors at 18%.

The rebirth of the technology sector is fueling demand for flex space, although the main driver for the industrial market remains the need for warehouse and distribution space. The report notes that as availability tightens in many primary markets, users are starting to show greater interest in secondary markets. The areas with the lowest industrial vacancies include Los Angeles; Albuquerque; Tucson, Ariz.; Orange County, Calif.; Portland, Ore.; and San Francisco, all with vacancy rates of 5.4% or less. Industrial transaction volume in the first seven months of 2007 was up 13% to $26.8 billion. Private investors accounted for 36% of industrial purchases, followed by equity funds at 25%.