Commercial Real Estate Market Remains
Active
Commercial property sales remain very active
despite a decline in market leasing fundamentals, according to presentations
at a commercial real estate forum at the National Association of REALTORS
Midyear Legislative Meetings & Trade Expo. More than 7,000 REALTORS and
guests are attending the May 13-17 meetings.
W. Cabell Grayson, senior managing director of CB Richard Ellis for the
Eastern United States, said the current commercial property sales market is
remarkable. "This is one of the hottest commercial investment markets in
memory," he said. "The emergence of individual investors and syndicates has
been remaking America in terms of commercial institutional investment, and
they have become the driving force of the commercial market over the last
five years."
Grayson said life and pension funds are the most active sellers of
commercial property, accounting for 26 percent of buildings sold in 2002,
followed by Real Estate Investment Trusts at 22 percent, and individuals or
syndicates who also sold 22 percent of properties. The typical commercial
transaction took 5.4 months to complete last year, down from 6.2 months in
2001.
"When you look at who's buying office buildings, 38 percent of properties
acquired last year were purchased by individuals or syndicates," Grayson
said. "REITs bought 26 percent of office buildings, while life and pension
funds purchased 24 percent."
Multifamily housing in 2002 was overwhelmingly purchased by individuals or
syndicates, which purchased 68 percent of apartment buildings. The average
number of bidders for institutional properties rose from 7.1 in 2001 to 10.0
last year. "This shows there is a ton of capital seeking commercial real
estate and making deals," Grayson said.
In the current market, Grayson said the hottest properties are multifamily
housing, retail space, major central business district office space, and
single tenant properties, especially leased space. Out of favor are suburban
office space, and flex or research and development space; multifamily could
weaken in the future.
"Despite a decline in market leasing fundamentals, investment property sales
are strong due to low interest rates and leverage. They're an attractive
alternative investment, and they offer relatively high spreads over
treasuries," Grayson said.
Scott M. Johnston, vice president of Spaulding & Slye Colliers for the
Washington, D.C., region, said the national office-leasing environment has
seen a drop in demand resulting from the technology bust, while construction
and subleasing activity have risen. "The result is higher office vacancy
rates and lower rents," he said.
Of the major downtown office markets, Johnston said the lowest vacancy rates
during the first quarter were in Washington, D.C., at 5.2 percent, New York
City, 8.5 percent, and Atlanta, 10.6 percent. The national office vacancy
rate for downtown markets was 15.0 percent during the first quarter, while
the suburban vacancy rate was 17.3 percent.
"Following September 11, 2001, people were speculating that the commercial
markets in Washington and New York would take a hit," Johnston said. "It's
ironic that the cities targeted in the terror attacks are now the two
strongest commercial markets in the country."
Johnston said a flight to value is being replace by a flight to quality
office space. "Landlords will fight to maintain occupancy levels through
early renewals for long term leases," he said. "Tenants will remain in the
driver's seat with an overwhelming number of options for the next 12 to 18
months." He expects a slow recovery in office leasing to begin around the
middle of this year, with a pickup in 2004.
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