Slow growth for U.S. commercial real estate in 2012, office sector will do worst

Jan.January 03, 2012 12:45 PM

The next year will bring slow but continued growth across all sectors of commercial real estate nationally, Grubb & Ellis’ 2012 National Real Estate Forecast released today says.

The multi-family and hospitality sectors will perform best, with office leasing performing the worst of all commercial sectors. Equilibrium in office markets nationally will remain elusive due to financial uncertainty in Europe. The “flight to quality” continues in most U.S. office markets, and subpar growth through the end of 2012 is expected, the report says. The national vacancy rate should reach 15.7 percent by year-end, net absorption should reach 52 million square feet, and new supply 9 million square feet.

The industrial market will remain relatively strong due to the lack of new supply, with large warehouse/distribution assets performing best. The price for warehouse/distribution space is expected to increase to $4.44 per square foot in 2012 from $4.23 per square foot in 2011. Smaller industrial spaces will recover more slowly, closer to the pace of the office market, the forecast predicts.

In the retail sector, leasing rates will not rise as consumer confidence will continue to lag due to depressed home prices. Retail landlords in struggling regions will continue to seek out non-traditional tenants, the report speculates.

The multi-family housing sector will continue to see rent increases as constrained inventory, high standards to qualify for financing, and the growth of the 18- to 34-year-old demographic boost prices.

“The wild card this year is the unresolved European debt crisis, which has the potential to send lenders and investors to the sidelines,” Robert Bach, Grubb & Ellis’ chief economist said. “If they stay in the game, expect overall commercial real estate sales to rise 25 percent in 2012, generating marginally lower cap rates for non-distressed assets.”

Across all sectors, the number of distressed properties will remain high, the report says, but fewer such properties will be offered by banks and more from CMBS servicers.– Guelda Voien

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