Vacancy rates continue to rise in most commercial sectors and are not expected to level out in most markets until the end of this year or early 2011, according to the National Association of Realtors^®.

Lawrence Yun, NAR chief economist, said there is one bright spot in commercial real estate. ”The multifamily sector can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year,” he said. ”However, the office, warehouse and retail sectors continue to experience the delayed effects of the recession. These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011.”

The Society of Industrial and Office Realtors^®, in its SIOR Commercial Real Estate Index, an attitudinal survey of nearly 700 local market experts,(1) confirms that significant fallout from the recession remains, but to a lesser extent.

The SIOR index, measuring 10 variables, increased 2.7 percentage points to 38.2 in the first quarter, compared with a level of 100 that represents a balanced marketplace. This is the second gain following nearly three years of declines; the last time the market was in equilibrium was in the third quarter of 2007.

Development activity remains at a standstill with nine out of 10 respondents saying that it is virtually nonexistent in their markets.

Looking at the overall market, commercial vacancy rates appear to be approaching a plateau, according to NAR’s latest COMMERCIAL REAL ESTATE OUTLOOK.(2) The NAR forecast for four major commercial sectors analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data were provided by CBRE Econometric Advisors.

Office Market
With an elevated level of sublease space available, vacancy rates in the office sector are projected to increase from 16.9 percent in the first quarter of this year to 17.6 percent in the first quarter of 2011, but should ease later next year.

Annual office rent is likely to fall 2.3 percent this year and decline another 2.1 percent in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is forecast to be a negative 24.6 million square feet this year and then a positive 25.5 million in 2011.

Industrial Market
Leasing activity in the industrial sector is below historical levels with higher vacancies, more tenant concessions from landlords and a steeper decline in rental rates. In addition, obsolete structures remain on the market. Industrial vacancy rates are expected to rise from 14.3 percent in the first quarter of 2010 to 14.8 percent in the first quarter of 2011, then decline modestly as the year progresses.

Annual industrial rent will probably drop 6.3 percent this year, and decline another 1.5 percent in 2011. Net absorption of industrial space in 58 markets tracked is seen at a negative 90.0 million square feet this year and a positive 135.6 million in 2011.

Retail Market
Retail vacancy rates should rise modestly from 12.6 percent in the first quarter of this year to 12.8 percent in the first quarter of 2011, and should hold at that level for most of next year.

Average retail rent is projected to decline 1.5 percent in 2010, then edge up by 0.4 percent next year. Net absorption of retail space in 53 tracked markets is likely to be a negative 3.7 million square feet this year and then a positive 8.9 million in 2011.

Multifamily Market
The apartment rental market — multifamily housing — is expected to benefit from an improving economy and job market. Multifamily vacancy rates are forecast to decline from 7.3 percent in the first quarter of this year to 6.3 percent in the first quarter of 2011.

With recent additions to supply, average rent is likely to slip 1.5 percent this year, and then rise 1.2 percent in 2011. Multifamily net absorption should be 145,700 units in 59 tracked metro areas this year, and another 214,500 in 2011.

The COMMERCIAL REAL ESTATE OUTLOOK is published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.

The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations — CCIM Institute, Institute of Real Estate Management, Realtors^® Land Institute, Society of Industrial and Office Realtors^®, and Counselors of Real Estate.

Approximately 79,000 NAR and institute affiliate members offer commercial brokerage services.

The National Association of Realtors^®, “The Voice for Real Estate,” is America’s largest trade association, representing 1.1 million members involved in all aspects of the residential and commercial real estate industries.

(1) The SIOR Commercial Real Estate Index, conducted by SIOR and analyzed by NAR Research, is a diffusion index based on market conditions as viewed by local SIOR experts. For more information contact Richard Hollander, SIOR, at 202/449-8200.

(2) Publication of additional analyses, including metropolitan data, will be posted under Economists’ Commentary in the Research area of Realtor.org in coming weeks.

The next commercial real estate forecast and quarterly market report will be released on August 26.

Tom Potiowsky, the State of Oregon Economist, recently presented his most current status of the Oregon economy to the Oregon SW Washington CCIM chapter. His presentation titled, “Oregon Economy: Up the Long, Long, Long Road to Recovery” aptly summarized his findings. The good news: the economy, which bottomed out last fall, is now growing again, although ever so slowly. Shown below are the top 10 facts I gleaned from Mr. Potiowsky’s presentation: 1. As of April 2010 the state’s unemployment rate is 10.6% compared to 9.9% nationally. 2. Job growth (-1.7%) ranks 41st for all states for April 2010 over April 2009 3. Total nonfarm employment dropped -3.0% year-over-year for the 1st quarter of 2010 4. The rate of decline in job losses has slowed from 10,000 a month for the first six months of 2009 to 875 per month for the first four months of 2010. Job losses are anticipated to continue through this quarter with only mild job growth the rest of the year. 5. Oregon exports increased 41% in the 1st quarter of 2010 compared to the same period last year but declined 23% when compared to 2008. 6. Personal income growth has almost stabilized at -0.1% for 4th quarter of 2009 over 4th quarter of 2008. 7. When compared to other states our unemployment rate is significantly better than Nevada and Arizona, about the same as Idaho and California and significantly worse than Utah and Washington. 8. From Oregon’s peak employment (which occurred in March 2008) it is estimated that it will take around 76 months (about 6+ years) to get state employment back to the same level. Only the 1980-82 recession took longer to recover from, that taking about 7 years. 9. U.S. employment is projected to take about 60 months to recover to the level it was prior to the recession. This is predicted to be the longest recovery period of the 10 recessions (by a wide margin) that has occurred since WWII. 10. Oregon’s Index of Leading Indicators is in positive territory for the first time since late 2007. The six-month annualized percent change is 3.3%. Nine of the 11 leading economic indicators are positive. So where we go from here depends on many factors. For example, on the upside other parts of the world could recover more quickly increasing the demand for our exports. On the downside, the potential for a real estate bubble in China or the affect of the Greek crisis on the Euro could adversely impact us and the rest of the world. Who knows? We can focus on the unknowns or those things out of our control or we can roll up our sleeves and focus on those things we can change. This reminds me of an old African proverb: Every morning in Africa, a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must outrun the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle. When the sun comes up, you better start running. Let’s all run in these difficult times as best we can to see another day!