Commercial Real Estate Market to Improve in 2012

Multifamily apartments remain strongest, while other segments moderately improve in concert with job growth and other economic factors.

Depressed conditions in the financial and small business sectors continue to negatively affect the commercial real estate industry and the nation’s economic recovery. That’s according to economists participating in the Economic Issues and Commercial Real Estate Business Trends Forum at the recent 2011 Realtors Conference & Expo.

Lawrence Yun, National Association of Realtors chief economist, shared his predictions for the commercial real estate market in 2012 and 2013, anticipating a steady improvement in commercial real estate markets.

According to Yun, the U.S. economy remains sluggish and continues to perform well below the desired pace of economic expansion. Still, he said at the current rate of growth, about 3 to 4 million jobs will be generated over the next 2 years.

While corporate profits have surged in the past year, Yun said that business spending and hiring remain low. Despite record-low borrowing conditions, he said that many businesses are also not taking out loans. As for why businesses are not spending their profits, Yun cited concerns about over-expanding during times of low economic activity and uncertainty about future government policies.

Another area of concern for the U.S. economy is small businesses, a major driver of new jobs. Yun said small businesses are not recovering from the downturn since small businesses owners don’t have access to startup capital since they lack large cash reserves and often use their personal savings and housing equity as a source of funding.

“I anticipate a small recovery in the next year in home values, which would help small business owners; however, that’s only if legislators and regulations don’t add obstacles to hinder the housing market recovery, such as modifying or eliminating the mortgage interest deduction or increasing down payment requirements,” said Yun.

Yun predicted moderate improvements in commercial real estate markets and the broad economy because job growth and other economic factors are slowly improving. He said that despite the stock market’s volatility, it is performing higher than it was in 2008, making it easier for companies to raise capital and for consumers to gain wealth.

Yun doesn’t anticipate a second economic recession in the near term, because of the strong cash potential that businesses could release into economy, which would help the country avoid a second recession. He said that international trade is expanding and that international home buyers are taking advantage of the weaker dollar and investing in commercial and residential real estate.

A majority of the commercial real estate sectors are still experiencing rising absorption and little improvement in rents. The multifamily apartment sector remains the strongest with net absorption rates increasing and vacancies decreasing, causing rents to rise across the country. Yun said that’s because rising foreclosures and short sales are driving many individuals into renting, and that the lack of available credit to qualified home buyers is keeping many in the rental market. However, high, increasing rents combined with record-low interest rates are enticing some individuals into the housing market.

At the session, Yun was joined by Kenneth Riggs, president and chairman of RERC and chief real estate economist of the CCIM Institute, and Robert White, founder and president of Real Capital Analytics, who shared his outlook for slight improvements in commercial real estate markets in the year ahead.

The National Association of Realtors, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.