Tenant Incentives Help CRE Business Expand

Commercial real estate sectors, hurt by weak job growth, are offering incentives in many areas that are conducive to business expansion, according to the National Association of Realtors (NAR).

Fallout from the recession is continuing to impact commercial real estate, said Lawrence Yun, NAR chief economist. “Vacancy rates are beginning to level off in some sectors, but rent discounts and moderate levels of landlord concessions are widespread,” he explained. “This is very much a tenant’s market, which is quite favorable for businesses that are considering expansion. It’s also encouraging that there is a modest improvement in the sentiment of commercial real estate practitioners.”

In an attitudinal survey of more than 600 local market experts, the Society of Industrial and Office Realtors (SIOR) Commercial Real Estate Index shows vacancy rates are beginning to level, but rents remain depressed, and subleasing space is high. Fifty-seven percent of respondents said they expect improvements in the office and industrial sectors in the third quarter of 2010.

Meanwhile, commercial real estate investment remained stagnant in all regions with low investment activity; 88 percent of respondents said it is virtually nonexistent in their markets, but development acquisitions are beginning to grow in many areas in what is described as a buyer’s market.

Looking at the overall market, vacancy rates will shift modestly in the coming year, according to NAR’s latest “Commercial Real Estate Outlook.” Vacancy rates in the office sector, with high levels of available sublease space are expected to increase from 16.7 percent in the second quarter of this year to 17.0 percent in the second quarter of 2011, but ease later next year. The market markets with the lowest office vacancy rates in the second quarter were New York City, Honolulu, and Long Island, N.Y., with vacancies around the 9 to 11 percent range.

Annual office rent should fall 2.7 percent this year and decline another 2.1 percent in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is projected to be a negative 13.6 million square feet this year and then a positive 22.6 million in 2011.
Retail vacancy rates should hold steady at 13.1 percent in both the second quarter of this year and in the second quarter of 2011, with a level pattern for most of next year. Markets with the lowest retail vacancy rates in the second quarter include San Francisco, Honolulu, and Miami, with vacancies of 7 to 8 percent.
Average retail rent is expected to decline 2.6 percent in 2010 and then flatten out, slipping 0.1 percent next year. Net absorption of retail space in 53 tracked markets is forecast to be a negative 2.3 million square feet this year and then a positive 6.4 million in 2011.