According to the latest research from CoStar Group, the U.S. commercial real estate market is in the midst of a continued recovery being led by the office, industrial and – to a lesser extent – retail sectors.
‘We may not be out of the woods just yet, but the data we've compiled for the first quarter certainly demonstrates an ongoing recovery and points toward future growth,’ says Walter Page, director of research for CoStar's property and portfolio research division.
According to CoStar, office net absorption was at 11.5 million square feet in the first quarter of this year – down from 16 million square feet in the fourth quarter of 2011, but more than double the pace from the first quarter of last year. New construction deliveries were exceptionally low, at just 5 million square feet, although construction activity is starting to rise with over 8 million square feet of new office starts in the quarter. Houston and Chicago led the nation at 1.6 million square feet each in net absorption, while Washington, D.C., with negative 421,000 square feet of net absorption, recorded the lowest level among the top metros.
Also in the first quarter, CoStar reports that industrial vacancy fell to 9.4% nationally – down 0.7 percentage points from one year ago. The reduction in vacancy, which has supported a 1.5% annualized change in rent over the past quarter, was mainly driven by positive net absorption of 20.9 million square feet in the first quarter.
Of the largest U.S. industrial markets, Chicago (2 million square feet), Los Angeles (1.8 million square feet), the Inland Empire region of California (1.8 million square feet) and Houston (1.2 million square feet) all exceeded 1 million square feet of net absorption. Together, these four metros accounted for a third of demand growth, which is 10% over the market share, as large box distribution markets continue to dominate new warehouse demand.
While the retail recovery was less pronounced, CoStar notes that the sector did achieve positive net absorption, a stable vacancy and a near-stabilization of rent. For the first quarter, vacancy nationally was unchanged at 7%, compared to 7.3% one year earlier. Net absorption of 9.4 million square feet was below the 16.2 million square feet of the fourth quarter of 2011. Retail completions were exceptionally low at just 4.3 million square feet, with a Salt Lake City urban retail project being one of the largest deliveries during the first quarter.
‘We forecast completions of retail space to remain depressed for the year,’ Page says. ‘In-process construction continues to fall compared to office and warehouse construction, which is rising slightly.’
Separately, the Mortgage Bankers Association (MBA) reports that commercial and multifamily mortgage origination volumes increased 55% in 2011, with mortgage bankers reporting $184.3 billion of closed commercial and multifamily loans.
Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) were collectively the leading investor group for whom loans were originated in 2011, responsible for $57.6 billion of the total. Life insurance companies and pension funds saw the second highest volume, $49.3 billion.Â
In terms of property types, multifamily properties saw the highest origination volume, $77.4 billion, followed by office properties with $34.4 billion of originations. First liens accounted for 93% of the total dollar volume closed.
‘Commercial mortgage lending continues to rebound from its 2009 lows,’ says Jamie Woodwell, MBA's vice president of commercial real estate research. ‘Originations for life companies, Fannie Mae, Freddie Mac and FHA were all strong, and banks, commercial mortgage-backed securities issuers and others also saw strong growth. With interest rates still low and stability returning to real estate fundamentals, the rebound is expected to continue in 2012.’