Commercial real estate companies, retail sector optimistic

As real estate fundamentals improve, effective retail rents see a rise for first time since 2008.

With signs pointing toward stable growth, commercial real estate managers are feeling good about future prospects.

As reported in the National Real Estate Investor, general economic prospects are improving. Unemployment is down, while gross domestic product forecasts predict a robust 3 percent growth in 2014. A total of 2.6 million additional jobs are projected for the end of 2015. Plus, low interest rates and plentiful capital allowed property values to climb and the foreclosure-inventory is down 24 percent.

According to a recent survey conducted by the Urban Land Institute, the volume of real estate sales this year may surpass $310 billion – almost $20 billion more than 2012. Commercial mortgage-backed securities are also expected to increase by 50 percent, hitting $70 billion by year's end. Projections indicate continuous growth through 2015.

Despite the shoring up of the market, the NAREIT forecast predicts a drop in returns, aligning with a sustainable pace of growth. The ULI/E&Y survey is forecasting a 9.5 percent increase in returns for investments in offices, apartments and retail buildings, according to the NREI.

Retail experiences a boost
For the first time in five years, the retail sector is seeing a jump in rents. According to CoStar, average retail property rents rose from $15.00 per square foot during the fourth quarter of 2012, to $15.07 during the first quarter. 

The first quarter saw retail vacancy rates fall by 30 basis points to 10.6 percent. According to data provided by Reis Inc., effective rents rose 0.7 percent to $19.13 per square foot.

"We are still talking about marginal improvement," Ryan Severino, Reis' senior economist, told NREI. "We really have to get into the middle of this decade before we start to see anything substantial."

Simon Property Group experienced a 3 percent increase in base minimum rent, reaching $41.05 per square foot – a 110 basis point hike from the first quarter of last year.

According to Ryan McCullough, an economist at CoStar, improvements in the housing market and consumer confidence are leading to stability. 

"This rent bump is a sign that the market is finally reaching some degree of equilibrium after two and a half years of slow, but steady recovery," said McCullough. "By 2014-2015, you'll see the economy in a much better place, a lot of the debt overhang that we are dealing with will be resolved."

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