Commercial Real Estate Market Stabilizing?

For the past several years, commercial real estate had been billed as the next big train wreck. Recently however, many investors have been shouting all aboard! Let’s see why.

The U.S. commercial real estate market ended on a high note in 2010, following blockbuster transactions in December. The sales figure for 2009 was $54.6 billion. In 2010, it increased to $115 billion, a mammoth 109% increase. Over $21 billion worth of transactions took place in December, which was the highest sum for a single month’s trading since the end of 2007. The fourth quarter sales of about $46 billion was comparable to the quarterly sales volume of 2004, which was considered a healthy recovery year.

Almost everyone in this industry was caught off guard by the sudden increase in transaction activity in 2010. Most of this recovery is centered on core assets in primary markets.  Analysts expect to see an increase in activity in secondary markets in 2011.

The apartment market seems to have made a clear shift to recovery mode since the beginning of 2010. The apartment vacancy rate was 7.1% in the third quarter of 2010, down from 8% at its peak in the fourth quarter of 2009. Other areas of the commercial property segments have also shown slight improvements. The national office space vacancy rate was 17.8% at the end of 2010, down by 10 basis points from the 17.9% peak it reached in the second quarter of that year. Commercial property investors are encouraged by the overall trend, and they anticipate a recovery in the leasing markets as well.

No one can guarantee that the commercial real estate recovery train won’t jump the track. There are many hills and valleys it must negotiate such as the rising number of shaky mortgages, weak household balance sheets, slow employment recovery, the recent back-up in bond yields, lack of corporate pricing power and poor fiscal outlooks at all levels of government.

Despite these hurdles and headwinds, some industry experts predict commercial sales to surpass $200 billion in 2011. There are plenty of factors to support such claims including the anticipated higher sales volume in the secondary markets, and an abundance of investor types – foreign investors, corporations, REITs, pension funds and private investors, who have all been waiting for the right time…and 2011 may just be their opportune time period.