The four major sectors of the commercial real estate market – office, retail, industrial and multifamily – can expect improvement over the next two years, according to a forecast presented at a commercial real estate forum at the National Association of Realtors (NAR) Midyear Legislative Meetings & Trade Expo held last month.

David Lereah, NAR’s chief economist, said there are pluses and minuses affecting the projection for the uptrend in the commercial market. “Corporate profits are strong, but business spending has been hesitant of late,” he said. “On the other hand, jobs have been growing since the beginning of 2004.”

Lereah said some uncertainties could potentially impact commercial sectors. “The U.S. federal budget deficit poses a risk for the economy, as does the trade deficit and performance of the dollar,” he said. Other concerns include high oil prices and the possibility of inflation.

On balance, Lereah said the fundamentals for all of the commercial real estate sectors are improving. “We’ve seen a strengthening in the job market, capital has been flowing into commercial real estate at record levels, the modest rise in interest rates is not impacting long-term investment, and there’s been a healthy restocking of business inventories.”

So far this year, investment in office buildings has increased 30 percent over 2004. Ports and major distribution centers are leading the industrial sector. Commercial lending is up while delinquencies are down, and construction levels have stabilized.

Office vacancy rates have been falling with a slowdown in new supply. This sector has benefited greatly from the growth in jobs, and rents are gaining traction. “There’s strong investor interest in the office market, both for real estate investment trusts (REITs) and foreign investors – the strongest investment areas are in the West and Northeast,” Lereah said.

Vacancy rates in the office sector should average 14.1 percent this year, and 13.2 percent in 2006. Office rents are forecast to grow 2.3 percent in 2005, and 3.4 percent next year.

Net absorption of office space, which includes leasing of new space coming on the market as well as space in existing properties, is projected at 61 million square feet in 2005, and 56 million next year.

In the industrial sector, performance is divided by age and location; some markets have high vacancy rates as a result of obsolescence. “Rents are struggling in some areas but rising in others, such as in Southern California, while port markets – both traditional and inland – are showing the strongest performance,” Lereah said. Overall, the pace of restocking is barely keeping up with shipments.

Industrial vacancy rates are expected to average 10.3 percent in 2005 and 9.8 percent next year. Industrial rents should rise 0.7 percent this year and 1.8 percent in 2006. Net absorption of industrial space is forecast at 133 million square feet this year, and 153 million in 2006.

In the retail sector, merger activity is continuing while there’s been a growth in retailers targeting the youth market. Rent gains are strong, as consumer spending growth is holding steady. Most new construction is in strip malls and power centers. “REITS also have been very active in the retail market, which offers the best long-term investment return,” Lereah said.

The average retail vacancy rate is projected to average 6.3 percent this year and about the same during 2006; rent growth is forecast at 4.4 percent in 2005 and 4.0 percent next year. Net absorption of retail space is estimated at 34 million square feet in 2005, and 29 million next year.

The apartment rental market – multifamily housing – can expect a higher number of renters as modestly rising mortgage interest rates cause a slight slowdown in home sales over the next year, and job growth fuels demand and helps to support higher rents. “New construction is focused in markets that can support additional supply, while conversion to condos has surfaced as a big trend in areas such as Miami, Northern Virginia and San Diego,” Lereah said.

The apartment vacancy rate is expected to average 6.2 percent in 2005 and 5.2 percent in 2006. Average rent is forecast to rise 2.5 percent this year and 3.0 percent in 2006. Multifamily net absorption is projected at 237,000 units in 57 metro areas tracked in 2005, and 262,000 next year.

A record of more than 9,000 Realtors and guests are attended the May 9-14 meetings in Washington.