"Commercial Real Estate Vacancy Rates"

Leasing market conditions improved in the third quarter at a pace ranging from barely detectable to brisk. The apartment market fit the latter description as the vacancy rate fell to 7.1 percent from 7.8 percent in the second quarter, one of the sharpest drops on record according to data-provider Reis. The office, industrial and retail markets all recorded a very modest drop of 10 basis points in their third-quarter vacancy rates. Asking rental rates typically lag vacancy, and at this early stage of the recovery cycle, landlords have little pricing power with the exception of some apartments and selected high-quality office and retail properties in primary markets. The drivers of demand for each property type are different. Apartments are benefiting from the high rate of foreclosures, the declining rate of home ownership, tight mortgage qualification standards, low additions to supply, favorable demographic trends and low-but-steady job creation this year. The industrial market had a strong second quarter thanks to manufacturing exports and inventory restocking beginning late last year, but those catalysts are losing momentum, dampening the market’s third-quarter performance. The retail market is showing more life than was expected 12 to 18 months ago. Despite the troubled housing market, consumers are responding to pent-up demand and to promotional pricing from retailers, who are in turn looking selectively for relocation and expansion opportunities. The office market will be the last to recover because it is so closely tied to job growth, which is weak. If the economy continues to expand even at a sluggish pace, commercial real estate leasing markets will slowly improve.

Best regards,

Bob

Robert Bach, SVP, Chief Economist, Grubb & Ellis

Tim With