Economic expansion and renewed optimism are fueling growth in the nation’s commercial real estate markets, although development options for industrial and office space remain limited, according to a recent survey conducted by the National Association of Industrial and Office Properties and compiled by CB Richard Ellis Investors, L.L.C.
“NAIOP’s semi-annual Vital Signs survey shows that optimism is growing among commercial real estate executives and their business activities are benefiting,” said Doug Herzbrun, Managing Director of CB Richard Ellis Investors, a subsidiary of CB Richard Ellis. “The survey results are significant because the respondents represent the opinions of many of the nation’s leading commercial real estate firms.”
NAIOP conducted the survey early in 2004 among 200 of its National Forum members and released the findings at the National Forums meeting last month. The NAIOP Forums comprises senior-level individuals extensively involved in commercial real estate and who participate and rely on the Forums for sharing information and ideas on owning and managing commercial real estate.
Economic optimism is at its highest point in survey history, more than double that of the NAIOP Vital Signs surveys conducted a year ago. Among the findings:
* Economy is Growing: Three-quarters of NAIOP Forum members feel the economy is growing, up from approximately 11 percent from April 2003, the highest percentage in survey history. More than half the respondents report growth in their local economy, with the greatest optimism prevailing across the South and the least in the Mountain states.
* Business is Increasing: More than 60 percent of survey respondents feel their business has improved during the past six months, up from 53.7 percent in the fall of 2003. The level of optimism was consistent across all regions.
* Financing is Stable: More than 90 percent of survey respondents reported that borrowing money is the same or easier than six months ago, and expect interest rates to stay in the same range during the next six months. While commercial real estate executives sense that business is picking up in their local markets, the favorable rating for investment declined industry-wide. Respondents continue to report that demand is the biggest threat to the health of most office and industrial markets.
Findings include:
* Weak Rental Market: Although nearly 48 percent of respondents reported that rents are dropping in their local office market, this represents a dramatic improvement over the last year. While rents continue to stagnate, half the survey members say land prices and prices of many basic building materials are increasing. Despite cheap financing, rents must increase in many markets to justify new development.
* Property Demand Yet to Improve: More than two-thirds of the survey’s respondents reported lack of demand as the biggest threat to their local office markets. However, the level of concern has subsided slightly during the previous six months.
* Development Options Limited but Growing: Investment continues to be favored over development for all property types. Respondents expressed growing interest in the development of warehouse/ distribution space and biotech/ life science facilities. The development potential of mixed-use projects is gaining attention, and it is the only market sector in the study that experienced an improvement in investment since the fall of 2003.
The problem of mold contamination and liability has decreased slightly in importance, while tenant bankruptcies and phantom space continue to be the dominant concerns of NAIOP members. Water availability and energy are also important issues in the Mountain region and the Pacific states.
“The Vital Signs survey has been conducted by NAIOP for the past nine years and has been a very reliable and accurate barometer on the state of the commercial real estate industry,” said Thomas Bisacquino, NAIOP president. “It’s encouraging to see positive signals on the economy and the improvement in our members’ businesses.”