Commercial Real Estate First Quarter 2012 Recap

First quarter 2012 softened a bit as compared to fourth quarter 2011, but net absorption remained positive according to Mark Heschmeyer of CoStar news.   Plus, a mild slowdown in the rate of recovery is balanced by the lack of new commercial space coming out of the ground so as a result, vacancy rates are still declining.  Construction financing is more available than it has been over the last four years but not by much.

Although debt issues, government cutbacks plus rising energy prices remain concerns, the overall market remains firmly in recovery mode led by the office and industrial segments .

The office market experienced solid net absorption although the recovery was softer in the first quarter 2012 versus fourth quarter 2011 with net absorption of 11.5 million sq ft versus 16 million sq ft. in the 4th quarter 2011.  The first quarter number was double the volume in the first quarter of last year.

All of the top markets experienced positive net absorption in vacancy except for Washington DC, which had a negative net absorption of 421,000 sq ft.  Houston and Chicago led with net positive absorption of 1.6 million sq ft each.  Overall this is good news with the national office vacancy rate falling below 13% for the first time since 2008.

The industrial segment is seeing strong positive absorption in primary and many secondary markets.
A sharp reduction in industrial vacancy was fueled by near zero new construction and the positive net absorption has supported steady to slightly rising rents.

First quarter 2012 industrial vacancy fell to 9.4% nationally, which is down 0.7 percent from first quarter 2011.  The vacancy reduction has supported a 1.5% annualized positive change in rent over the past quarter, was mainly driven by positive net absorption of 20.9 million square feet in the first quarter.

Of the largest U.S. warehouse markets, Chicago (2 million square feet), Los Angeles (1.8 million square feet), Inland Empire (1.8 million square feet) and Houston (1.2 million square feet) all exceeded 1 million square feet of net absorption. Together, these four metros accounted for a third of demand growth, which is 10% over the market share, as large box distribution markets continue to dominate new warehouse demand.

The retail recovery isn’t as robust as office or industrial, but still produced positive net absorption for the quarter with stable vacancy and near stable rents plus vacancy was a lot lower to begin with.

First quarter 2012 retail vacancy nationally was unchanged at 7% from fourth quarter,  compared to 7.3% one year earlier.  Net positive absorption of 9.4 million square feet was below the 16.2 million sq ft. from the fourth quarter of 2011. New retail construction completions were exceptionally low at just 4.3 million square feet.

“We forecast completions of retail space to remain depressed for the year,” according to Walter Page, director of research for CoStar’s Property and Portfolio Research division.  New construction continues to fall compared to office and warehouse construction, which is rising slightly.”

Market vacancy rates range from 2.8% in San Francisco to 12.1% in Phoenix.   At the metro level, retail performance was more mixed than other property types, with few standout markets. For example, market rent over the past year ranged in a narrow band with most markets showing a -5% to +2% change.  For the quarter, approximately one-third of the markets recorded negative net absorption, suggesting that the retail recovery is still weak.

The only real positive see in the retail sector is that the triple net or absolute net, single tenant, long corporate backed leased, with investment grade tenants continues to sell briskly.

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