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# Commercial climate reaching new heights
- URL: https://www.smdp.com/commercial-climate-reaching-new-heights/
- Published: 2006-06-07T15:00:00.000Z
- Updated: 2026-10-25T00:12:54.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By JODI SUMMERS*

The healthy economy is creating a strong demand for commercial and industrial space, and institutional investors are returning to the market, according to the latest commercial market update and forecast from the National Association of Realtors (NAR).

David Lereah, NAR’s chief economist, has declared that the market fundamentals are improving.

“Commercial real estate vacancy rates are falling and rents are rising as the economy expands and jobs are created,” he said. “Growth in the Gross Domestic Product is fairly strong and consumer spending remains healthy. Business spending is on the rebound, and the completion of new commercial buildings has shown positive growth over the last two years.”

Capital continues to flow into commercial real estate at strong levels, and delinquencies are minimal. According to the Mortgage Bankers Association, commercial mortgage originations totaled $201.7 billion in 2005, which is a 48.2 percent increase over 2004\. Much of the funds, 35.8 percent, flowed into the multi-family sector; office real estate, 24.1 percent; retail, 16.5 percent; industrial, 7.4 percent; and hotel, 6.4 percent, followed.

Government spending also is strengthening the commercial sector, increasing more than 2 percent in the first quarter of 2006\. Strong corporate profits are leading to business expansion, wages are growing and 2 million jobs were created in 2005\. Imports and exports remain at high levels, fueling port business and industrial activity.

After bottoming-out in the first quarter of 2002, the rate of return on commercial property is now greater than 5 percent for all types of investment properties — apartment, industrial, office and retail, according to research from Haver Analytics and the National Council of Real Estate Investment Fiduciaries.

Developing areas that will see the biggest commercial growth are the areas where people are buying second homes.

“Migration favors warm weather and low taxes, so states with the biggest net migration are seeing commercial growth,” Lereah notes.

Think Florida, Arizona, Nevada, Georgia and North Carolina.

Here are the NAR’s projections for five major commercial sectors — office, industrial, retail, multi-family and hospitality markets, according to Torto Wheaton Research and Real Capital Analytics.

Trade and distribution are driving the industrial market, with greater demand in the West and Southeast. Institutional investing in industrial property was up 65 percent in 2005 to $34.5 billion. There is strong build-to-suit activity, and urban industrial properties are being redeveloped for mixed-use and residential purposes.

Net absorption of industrial space in 54 markets tracked is expected to be 265 million to 270 million square feet in 2006.

Industrial vacancy rates are projected to drop to close to 9 percent in 2006; down from 11.7 percent two years ago. Industrial rents should grow an average of 3.8 percent.

Office vacancy rates are the lowest since 2001, with rents growing in almost every major market. Investment volume in office real estate grew by 34 percent in 2005 to $99.7 billion. Institutional investors have returned to office acquisition.

Projections show 350,000 office jobs will be created in 2006.

Net absorption of office space in 56 markets tracked projected that in 2006, 90 to 95 million square feet will be absorbed.Vacancy rates will average in the 12 percent range, and overall office rents are expected to rise 5 percent this year.

In 2005 Los Angeles topped the list of attractive retail markets for investors. Retail is the most inconsistent commercial market. There is an abundance of retail space in Indianapolis, Cincinnati and St. Louis, but drastic shortages in San Francisco and Las Vegas.

Net absorption of retail space is seen at 30 to 32 million square feet this year. Retail rents in 54 tracked markets are forecast to increase to an average of 4 percent in 2006.

The apartment rental market has benefited from rising mortgage interest rates, as well as people wanting to get out at the top of the market. Job growth and migration are driving demand, primarily in the West and Southeast. Conversion of apartments into condos is waning.

Multi-family net absorption in the 59 tracked metro areas is expected to be about 285,000-290,000 units in 2006.Vacancy rates are expected to be 5 percent, and rent growth is seen at 5.3 percent for 2006.

Hotel occupancies are projected to average 68.7 percent for 2006, the highest since Sept. 11, 2001\. Markets such as Honolulu and New York City have occupancies greater than 80 percent. Revenue per available room should be $76 this year — an increase of 6.3 percent from 2005\. The greatest growth markets are expected in Atlanta and Houston.

For more on Southern California commercial properties there is a great information blog at www.socalindustrialrealestateblog.com. (Jodi Summers is director of the investment division at Boardwalk Realty Santa Monica. For your real estate needs, , or call (310) 309-4219, or visit her Web site at www.santamonicalandmarks.com.

*Originally published in the Santa Monica Daily Press print edition on June 7, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/060706.pdf?ref=smdp.com)