Renovations, not construction, fueling commercial growth

Renovated buildings, not newly constructed ones, are helping the commercial real estate market.

New construction typically balances demand in a market, but according to a recent report, newly renovated buildings – not new construction - are fueling growth in the commercial real estate market.

According to a study from NAI Global, the largest global network of owner-operated commercial real estate brokerage firms, multifamily and industrial real estate are currently two of the nation's top commercial real estate sectors.

Dr. Peter Linneman, chief economist at NAI Global, said the renovation of industrial buildings has led to the sector's recovery, along with demand for online warehousing. Linneman noted that the industrial sector has notched healthy levels of vacancies that will continue to fall in the near future.

Construction for multifamily housing, meanwhile, is starting to rise but remains below normal levels. According to NAI Global, the largest capital gains seen in multifamily stem from renovation projects. Linneman notes that several years of limited multifamily housing production culminated in a shortage that will keep rents in the sector above average but below the maximum.

"The U.S. commercial real estate market today is doing what we expect it do in an era of political and capital market uncertainty where we are seeing very little new construction," Linneman said. "However, when we have more clarity than uncertainty, we could see stunning economic growth reminiscent of the 1970s-80s and post-World War II."

One sector struggling with construction and more
While recent renovations have helped turn the tide in the industrial and multifamily housing sectors, the office market hasn't been so lucky.

NAI Global reported that both renovation and construction projects in the office sector are at an all-time low.

Renovation projects are starting to trickle in again toward pre-recession levels despite the employment sector still stagnant. Consequently, vacancy rates in the office sector have seen a slower decline, though they should continue to drop as the economy progresses.

Office rates are only above average in cities where jobs have regained strength. NAI states those markets include: Boston, Chicago, Dallas, Houston, Los Angeles, New York, Philadelphia, San Francisco and Washington, D.C.

"Demand for office space is still subpar, but, nevertheless, it has been consistently positive for multiple, consecutive quarters," said Kevin Thorpe, chief economist at Cassidy Turley. "At the same time, new supply remains extremely constrained. In fact, demand for office space has now exceeded new supply for over two years. So the office sector is clearly tightening in most cities across the country."

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