Commercial Real Estate Looks Stable In 2001
Lesley Hensell, Realty Times Columnist
Thursday May 3 9:06 AM ET
Could it be that the most feared and highly publicized recession in U.S. history will also be among the shortest and least painful? If recent economic data is right, than the "recession" of late 2000 and early 2001 already has sounded its own death knell as commercial real estate slowly bounces back.
Real estate stocks that had lost value over the last few months now are in the black for the year, while the fundamentals are generally looking up for the third and fourth quarters.
In April, real estate investment trusts (REITs) erased losses for the year on Wall Street. The market index compiled by the National Association of Real Estate Investment Trusts (NAREIT) now has posted a gain of nearly 4 percent in 2001. All segments tracked by NAREIT have gone positive on the year, from a 3.09 percent return for equity REITs to 33.57 percent yields for mortgage REITs and 30.43 percent for hybrid REITs.
Yet the sector continues to lag behind other industries in terms of stock price multiples of all stripes.
New data suggests, however, that we may see a quickly recovering commercial real estate market.
"The expected economic rebound in the second half of this year should bode well for all commercial real estate markets," says David Lereah, chief economist for the National Association of Realtors. "Vacancy rates should remain generally low, while rent increases will be modest compared to the overall rate of inflation. The double-digit rent hikes we observed in a number of major markets will not be repeated in 2001, given generally weaker economic conditions."
In other words, the heyday of the late 1990s may be over, but recovery -- although a quiet recovery -- should result in decent performance for real estate companies.
Some markets are still hot. In the office space sector, Boston, Austin, San Jose, San Diego and Orange County, Calif., should see relatively high growth rates, according to the NAR's first-quarter research. Note that while these areas have been hardest-hit by layoffs at small tech firms, they still are hotbeds of new technology development and investment.
And while vacancy rates will rise, they may not look much worse than anything seen over the last couple of years. Last year's vacancy rate in 54 major markets was 9.9 percent for the year. In 1999, it was 10.3 percent. For 2001, it is expected to be 10.8 percent -- hardly a sign of recession. As well, new space coming online will cause the increase in vacancies, rather than a drop in current occupancy.
Retail space also is expected to rebound nicely. The hardest-hit segment in late 2000, especially with the closure of major retailers like Montgomery Ward, vacancy rates should be about 9.9 percent in 2001, up just a half-point from 2000.
The biggest change from last year should be construction starts. During the fourth quarter, 54 major markets saw 38 million square feet of construction starts, down 22.4 percent from the third quarter. And with vacancy rates pushing 10 percent, who could argue that is a bad thing?
One sector not seeing a rebound is lodging, which saw extremely aggressive growth in 1999 and 2000. Demand should subside in 2001, according to NAR. Still, revenue per available room is expected to grow 3.3 percent this year.
So what's ahead for commercial real estate? Reasonable growth -- if the predictions are right.
realestate.yahoo.com
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