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Recovery in REALTOR® Commercial Markets Continues in First Quarter

The recovery in commercial REALTOR® markets notched a noticeable gain during the first quarter 2013, as sales and leasing activity advanced.  Based on the results of the May Commercial Real Estate Market Survey, commercial practitioners reported a solid start to the year.  REALTORS® rated the direction of commercial business opportunities 4.0 percent higher from the fourth quarter 2012, in the wake of a 6.0 percent rise from the third quarter of last year.

On the fundamentals side, leasing activity rose 5.0 percent over the previous quarter, pointing to a steadily rising demand.  On the supply side, new construction was virtually flat, with a 0.5 percent advance from the fourth quarter.  Vacancies declined for all property types, except multifamily, which increased 60 basis points to 7.9 percent in the first quarter.  Competition from residential property rentals is adding pressure on availability rates in the multifamily space.  Office vacancies declined 60 basis points, to 17.6 percent, while industrial rates declined 310 basis points, in addition to the 240 basis point drop in the prior quarter.  Retail rates decreased 10 basis points, to 16.0 percent.

As vacancies continue to decline, landlords find fewer reasons to provide rent concessions.  The market strengthening was further illustrated by rising rental rates in the first quarter.  For the first time since the inception of this series in the fourth quarter 2008, rental rates turned positive, gaining 1.0 percent in the first quarter.  In terms of space requirements, tenant demand remained strongest in the 5,000 square feet and below.  The first quarter witnessed growth in demand for spaces in the under 2,500 square feet range, with 42 percent of REALTOR® clients opting for such space.  Lease terms remained steady, with 36-month and 60-month leases capturing the bulk of the market.

In line with broader market trends, investors have clearly signaled a strong interest for secondary and tertiary markets, following higher yields in stable markets.  Investment sales rose 3.0 percent from the fourth quarter, and 5.0 percent year-over-year. Nationally, 64 percent of REALTORS® reported completing a sales transaction during the quarter. Prices gained 0.3 percent compared with a year ago.  Cap rates rose on average from 9.0 percent to 9.2 percent across all property types.

The average transaction price moved from $1.2 million to $1.1 million in the first quarter. Commercial practitioners continued to find financing as the top obstacle in closing deals, followed closely by price disagreements between buyers and sellers.  Inventory remains a concern for about one in five practitioners.

For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.

George Ratiu, Research Economist

George Ratiu, Research Economist, writes regular economic columns and conducts research in the areas of commercial real estate, international investments, mortgage performance and foreclosures. He produces NAR’s Commercial Real Estate Outlook and manages quantitative surveys, including the Commercial Real Estate Quarterly Market Survey.

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