SAN FRANCISCO – Nov. 15, 2013 – After several years of slow-moving growth the commercial real estate market is in a recovery mode as transaction volume increased 27 percent over a year ago and prices display solid gains, said National Association of Realtors® (NAR) Chief Economist Lawrence Yun during a commercial real estate forum at NAR’s recent convention.
While the overall commercial sector appears to be improving, Yun said this isn’t the case in all levels of the commercial market. “Realtors involved in commercial real estate have reported they’re still seeing little improvement,” said Yun. “Commercial members typically handle smaller transactions, properties under $1 million; this part of the market is moving incrementally. At the opposite end, expensive properties priced above $2 million are doing much better. What we’re seeing is two very distinct markets within the commercial sector.”
The apartment sector continues to perform better than other sectors in commercial real estate with increasing prices and decreasing vacancy rates. Yun predicts the rental population will continue to rise over the next five years because of an increase in household formation.
The office market has also turned positive. Office vacancy rates are decreasing, and rents have recently turned the corner into positive territory. While companies are hiring more people, office space isn’t increasing. This might be due to employees sharing office space; however, Yun predicts the trend can’t continue. As hiring increases, net absorption will increase along with it.
The retail sector has had a modest increase in rents and slight decrease in vacancy rates. Yun says retail spending is determined by consumer confidence, which is in turn determined by housing prices. As housing prices increase, Yun predicts retail spending will improve.
In the industrial sector, vacancy rates have declined as rents remained positive.
According to Yun, the economy is growing – but at an unimpressive rate. “The pace of expansion has been frustrating,” he said. “Job growth is slow and consumers have held back on their spending.”
Seven million jobs have been recovered over the past four years, yet Yun predicts we need another 6 to 8 million to be fully back on track. Consumer confidence is also stuck at low levels. While consumers remain optimistic about the present, they aren’t confident about the economic future.
Richard Whitsell, president and CEO of Fresno First Bank, also spoke at the commercial forum. Whitsell touched on a number of issues affecting small banks and discussed their impact on the commercial real estate market. He said some of the challenges affecting small banks as a result of the economic downturn are increased regulatory scrutiny and regulations, as well as pressure on capital requirements.
According to NAR data, commercial members receive their financing mostly from regional and local banks, as well as credit unions. But many members say that it’s still difficult to receive credit because of regulatory conditions and uncertainty.
Whitsell pointed out that recent legislative and regulatory impacts, such as those from Dodd-Frank, have made it difficult to bring capital into the commercial real estate market. Since the regulations aren’t fully implemented, it’s hard to tell the full impact it will have on loans.
Whitsell discussed a number of the ways local banks differ from major banks. One of those is their ability to be more flexible with loan terms and conditions, as well as their reliance on a borrower’s trust and character.
“Our decision process on whether to approve a loan is different than if someone walked into a major bank,” he said. “We rely on local business members to help us make the decision. Fortunately, we can also be more flexible on the terms and conditions of a loan. As a local bank we look at it as we’re in this together with the borrower.”
© 2013 Florida Realtors®