Commercial Real Estate Investments Expected to Remain Strong
Washington,R DC -- espectable job growth, improving fundamentals, favorable interest rates and limited speculative construction suggest strong investor appetite will continue in 2007, according to a commercial market update and forecast presented here at the National Assn. of REALTORS® Midyear Legislative Meetings and Trade Expo.
Investment in commercial real estate rose 11% to a record $306.8 billion in investment-grade transactions in 2006, with office buildings leading the way. Institutional investors continue to pour funds into commercial real estate, commercial lending volume is up and delinquencies remain relatively low.
Lawrence Yun, NAR senior economist, said fundamentals have firmed in most sectors. "Over the past year, 2 million jobs have been created, and unemployment has been hovering at or below the ‘natural rate’ of about 5% supporting the office sector in particular," he said. "The office market is the sector of choice, but growing international trade is strengthening the demand for warehouse and distribution facilities.
"With these positive fundamentals and strong spending so far this year, we expect the appetite for commercial investment to remain historically high in 2007,' Yun said.
U.S. exports have been rising solidly, and business spending for building construction is rising at double-digit rates -- boosted by record corporate profits. Much of the new commercial construction currently is build-to-suit, or with a lead tenant.
On the downside, construction costs are rising due to global economic expansion, and pressures on core inflation are worrisome. Retail demand is decelerating and the economy is slowing. "Residential construction has become a drag on the economy, resulting in sub-par economic growth," Yun said. "Because commercial sectors follow the economy, commercial markets are in a process of normalizing."
The NAR forecast for major commercial sectors includes analysis of quarterly data for various tracked metro areas. The sectors include the office, industrial, retail and multifamily markets. Metro data were provided by Torto Wheaton Research and Real Capital Analytics.