Commercial real estate primed for stronger 2012

Jessica SarterCommercial Lending

The U.S. commercial real estate sector is on the mend, as sustained job creation, improved vacancy rates and higher leasing activity points to a gradually improving market, according to a report released last week by the National Association of Realtors.

The NAR projects commercial vacancy rates to decline 0.4 percent in the office sector over the next year. Analysts expect that figure to rise by 0.8 percent in the industrial real estate sector, 0.9 percent in retail and 0.2 percent in multifamily rentals.

"Household formation appears to be rising from pent-up demand," said NAR chief economist Lawrence Yun. "The tight apartment market should encourage more apartment construction. Otherwise, rent increases could further accelerate in the near-to-intermediate term."

Still, a tight credit market may drive some investors and real estate holders to turn to alternative commercial lenders to finance their operations. While the traditional credit market has been more difficult for small firms, economists expect overall conditions to remain tepid through 2012. Gallup chief economist Dennis Jacobe, for example, has urged Congress on several occasions to pass legislation expanding credit access to small businesses and entrepreneurs.

The Society of Industrial and Office Realtors reported a considerable gain in its SIOR Commercial Real Estate Index, which measures the sentiment of nearly 300 local market experts. According to the report, the index climbed 8.3 percent to reach 63.8 points in the fourth quarter of last year, following a mild increase of only 0.6 percent in the previous quarter.

While the increase alludes to a gradual recovery in the commercial real estate market, the index is still well below 100 – the threshold that represents a balanced marketplace. The index has not been above that level since the third quarter of 2007, months before the collapse of the housing market and the ensuing economic downturn.