US Commercial Real Estate Sluggish Till 2011

Posted on March 5, 2010
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Commercial developers and investors in the Chicago area and all across the U.S. are used to seeing commercial real estate activity lag behind the residential sector. They see this lag when approaching a recession and when coming out of one. This pattern is holding again during this recession. Because of the depth and severity of this recession things are even worse this time than usual.

While there are signs in many markets across the US – and even in the Chicago area – that the economy is starting to revive, commercial real estate activity continues to lag. And according to a February National Association of Realtors Commercial Real Estate Outlook it is not likely to turn around until some time in 2011.

Commercial real estate developments rely on consumer confidence, unemployment rates, and the vibrance of the retail sector. Until these turn positive again developers and investors are hesitant to enter the rental market.

According to one survey almost nine out of 10 survey participants said new commercial activity does not exist in their regions, and just about everywhere commercial rentals are down.

The availability of commercial credit also continues to be a big problem. A small number of banks say they will start expanding their commercial lending this year, but most are continuing to stay out of this market.

Office vacancies across major commercial markets in the US are expected to rise from 16.3 percent in Q4 of 2009 to 17.6 percent in Q4 of 2010. Vacancies are expected to start down in 2011, but only slowly.

Total office rentals declined 12.7 percent in 2009, and are expected to decline a further 7.2 percent in 2010. The trend in industrial rentals is expected to follow a similar path – declining a further 9.6 percent in 2010.

The only bright spot in commercial real estate is apartment rentals. As people downsize or are pushed from their homes due to economic factors they often turn to apartments. Multifamily vacancies are expected to decline to 6.6 percent from 7.4 percent in Q4 of 2009. However, average multifamily rental will continue to decline by about 3.4 percent in 2010.

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