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• New economic data continue to reinforce the idea that California’s economy is improving.
• Retail sales are expected to grow but at lower rates.
• Industrial lease rates for the Basin increased slightly in the fourth quarter compared to last year.
• For the first time in a long time, office lease rates are holding steady for all of the Los Angeles Basin.
• Multifamily vacancy rates throughout the Basin are extremely low and expect for them to remain low for the foreseeable future.

NAI Global Issues 2012 Global Market Report; 26th Annual Volume Provides Review/Forecast for 217 Commercial Property Markets Worldwide

PRINCETON, NJ, January 11, 2012 – The commercial real estate industry demonstrated positive signs of growth of in the first half of 2011, but by year’s end many markets worldwide were coping with the impact of financial uncertainty in Europe and the United States, according to the 26th annual Global Market Report released today by NAI Global. 

Activity was strong in the first half of 2011, as corporate space users took advantage of a global tenant’s market to reduce overall occupancy costs through consolidation and locking in low effective rental rates. However, commercial real estate markets across the globe were weighed down by the global financial crisis in the second half of the year. Most markets are continuing to show signs of improvement, but at a slower pace. However, with limited new construction, markets could tighten quickly should the pace of the economic recovery pick up.

“While the level of optimism varies from market to market, commercial real estate market fundamentals are generally improving,” said Jeffrey M. Finn, President and CEO of NAI Global. “Corporations once again are moving forward on plans, taking advantage of a tenants’ market worldwide to reduce their overall occupancy costs. Investors are beginning to chase yield as they move beyond core trophy assets to the quality opportunistic plays in strong secondary markets. With a tremendous amount of capital amassed on the sidelines, we expect more assets to transact as pricing continues to hold steady.”

Capital markets showed clear signs of improvement as historically low interest rates and high investor demand resulted in significant increases in global investment sales volumes. Cap rates compressed in most primary and secondary markets, as well-capitalized REITs, private equity and institutional investors aggressively pursue yield. With a relative shortage of quality assets on the market, this trend is likely to continue into 2012. Investors are also acquiring large portfolios of loans and REO as financial institutions are placing more product on the market.

While the level of real estate recovery varies from market to market, many markets across the U.S. are showing signs of recovery, as are parts of Asia, Europe and Latin America. However, the continuing uncertainty in the euro zone and the United States is creating a highly volatile global market that is impacting economic recovery in markets worldwide.

“The US economy is well over two years into the most anemic recovery in post-WWII history,” added Dr. Peter Linneman, NAI Global Chief Economist and Principal at Linneman Associates. “With the exception of home prices, all of the key economic indicators are on the ascent from their respective low points, but are at multiple standard deviations from historical norms. Job growth will be crucial for recovery in real estate markets, as jobs are needed to fill vacant space.”

Now in its 26th year, NAI’s Global Market Report offers insider insight and perspective on market conditions reported by NAI experts on the ground in over 200 property markets worldwide. To obtain a copy of the full report, contact eingberman@naiglobal.com.

Select U.S. Markets Highlights

Office occupiers are taking advantage of low rental rates to upgrade to Class A office properties in central business districts throughout the country. However, while leasing activity has been strong, many organizations are consolidating operations by embracing efficient space design and reducing their office footprint, resulting in negative absorption in some markets. Vacancy rates for CBD Class A office increased by 4% to 13.8% in 2011. National average asking rents slipped from $32.51 in 2010 to $29.59 in 2011.

Retail markets improved slightly, though many retail centers continue to cope with large big box vacancies. Many markets have had new entries with local retailers taking advantage of low rents to backfill vacancies left by national chains, especially in better locations. The power center vacancy rate declined to 8.7%, a 6.5% decrease from
2011, while average asking rents declined by 5.1% to $17.58. The CBD retail vacancy rate declined to 7.4%, a 10.1% decrease from 2010 with CBD retail average asking rents declining by $6.77 to $33.02.

Industrial markets across the country are increasingly bifurcated, with strong demand for well-located Class A industrial properties and little demand for outmoded Class B and C properties. With limited new construction, vacancy rates for bulk warehouse space stabilized at 10.6%, a modest 10 basis-point decrease from 2011. Bulk warehouse rents weakened by $.041 to $4.14. However, much of the decline in asking rents reflects the low rents of subpar Class B and C properties.

Atlanta: The Atlanta office market has recorded positive absorption of late with vacancy rates averaging 19% and rental rates continuing on a downward trend. The industrial market was on track to finish the year with the largest occupancy gains in several years due to expansions, regional consolidations and small new business growth. The retail market vacancy remains at 10% with positive momentum as retailers backfill empty big boxes in shopping centers across the region.

Boston: The Boston office market has stabilized with the vacancy rate remaining at 14%, unchanged from the previous year. Demand continues to grow for quality medtech/flex space and good warehouse and distribution space with the industrial vacancy rate declining to 11%.

Chicago: After a two year period of rising vacancy, conditions in Chicago’s Downtown market improved, with the vacancy rate now standing at 15.4%. The suburban market has been more volatile, with a vacancy rate of 21.3%. The Chicago industrial markets have been in a recovery phase for more than a year with positive absorption and declining vacancy rates.

Dallas-Fort Worth: The Dallas-Fort Worth downtown office market realized positive absorption as many corporations grabbed prime spaces, including relocations from suburban markets. The industrial vacancy rate has stabilized at 11% and will continue to improve as a result of regional job growth. Lack of new construction and demand from big-box chains, discount stores and fast food chains have resulted in declining retail vacancy across the region.

Los Angeles: Conditions in the Los Angeles office market remain soft as high unemployment has significantly impacted demand for office space. Vacancy rates remain elevated and asking rents remain low in both downtown and suburban markets. The industrial market is starting to rebound due to increased activity at the Port of Long Beach.

Miami: At $40.93, Class A rental rates for CBD office are stabilizing, though landlord concessions remain generous and vacancy rates remain above 20%. Miami industrial markets are improving with vacancies declining and rental rates increasing as a result of increasing export growth with Brazil. Demand for retail remains balanced, especially in preferred markets, where rental rates are likely to grow by over 10% in 2012.

Washington, DC: The downtown Washington DC office market experienced 1.3 million SF of positive net absorption with asking rents increasing to $54.00 per SF for Class A space and vacancies declining to 11.5%. While government leasing is expected to slow in 2012, private sector demand is likely to increase in 2012 as the region’s economy improves.

Select Global Market Highlights

Asia-Pacific Region: Asia Pacific investment markets have not been immune to the global volatility, most recently with the euro zone debt crisis. In the Asia Pacific region, Hong Kong, Singapore, Japan, and Australia all saw transactions slow in H2 2011, although China’s volume for both commercial property and land continued to increase, but at a far slower pace. Rapid rental rate increases in the office market have ceased in Singapore and Hong Kong and are now in a downward mode, with these markets having clearly peaked. Tokyo, Kuala Lumpur, Seoul, Ho Chi Minh City and Taipei are at or approaching the bottom of declining rent phases and will start to see higher rates.

Canada: The Canadian economy, led by exports and a strong commodity cycle, performed well through 2011. Anchored by a stable banking sector, the Canadian economy out-performed most other developed economies. GDP growth declined slightly from 2010 and is expected to be about 2.1% for 2011. The supply-demand characteristics of the real estate sector appear balanced in most markets and asset classes. There is increased investment and construction activity, which bodes well for a slow, but steady recovery continuing through 2012 and more robust growth in 2013.

Europe: The European economies, particularly those in the euro zone, continue to face unresolved problems relating to the debt crisis and the imbalance between national economies. Economic forecast currently show 2011 growth of 1.6% and an estimate of 0.6% for 2012. The property investment markets in Europe, with few exceptions, reflect the macroeconomic uncertainties. Inflation remains a concern across the euro-zone with many investors worried that, on average, property rents will be unable to exceed inflation rates over the next five years. Generally, investors have sought security,
and activity has focused on prime properties, though such assets are in short supply.

Latin America & the Caribbean: The Latin America region continued to grow and expand throughout 2011, despite the sluggish US recovery and turmoil in the euro zone. The Latin American growth estimate is 4.3% with most countries reporting healthy growth figures and unabated growth in real estate markets. Both demand and supply will increase further in 2012, with a landlord’s market in most of the region’s cities. The retail sector may see lease rates increase markedly for shopping malls and High Street locations in major markets (Brazil, Mexico, Colombia and Peru), due to continued strong consumer demand.

Highlights include:

• The combination of high vacancy and low rents has almost completely eliminated the need for new construction on the whole.
• Brokers specializing in the retail and industrial markets reported greatest interest in future requirements.
• NAI Capital’s multifamily specialists expect rents to increase slightly in the coming months.
• Leasing activity during the first six months of 2011 increased as economic conditions in the Los Angeles Basin improved.

Highlights include:

• California’s economy is slowly improving.
• Retail sales are expected to grow but at lower rates. The recent reduction in the California sales tax rate may give retail sales a boost in the short term.
• Los Angeles County has the lowest vacancy rate for office space.
• Of all the markets, industrial is showing the most signs of life.
• Although limited in data, this issue includes a new multi-family section.

More information may be obtained directly from your NAI Capital broker.

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In this issue Dr. Linneman and Associates discuss their predictions for pricing in the U.S. Commercial Real Estate market in depth and detail.

As always, please remember Dr. Linneman has a world view while we tend to hold a more parochial or local view, so all of the opinions contained in The Linneman Letter need to be tempered with our real world experiences in our regional markets.

NAI Capital is pleased to present to you its
2011 Spring Market Perspective for Southern California.

• Year-over-year unemployment rates fell sharply for each county
• After suffering one of it’s worst recessions, the Los Angeles Basin and Ventura county are on the rebound
• The Retail segment in Southern California has grown for six consecutive quarters and is likely to continue to improve
• Office demand is on the rise in Orange County
• Manufacturing and the industrial market are expected to slowly improve throughout the region