ANAHEIM, Calif. - The commercial real estate market is ending a solid year, but can be expected to slow, according to a representative of the National Association of Realtors.

NAR consulting economist John A. Tuccillo discussed the outlook for the commercial real estate industry during a forum at the association's annual convention and trade exposition. Nearly 17,000 members and guests are attending the November 6-9 convention.

According to Tuccillo, office construction rose this year to about 1.6 percent of total inventory, double the level in 1997. Absorption rose at a slightly higher rate than construction, but was much slower than in 1997, when it was about 2.8 percent of inventory. "This slowdown in the absorption of office space to roughly the same level as construction is a red flag. Some markets, notably in the South, are somewhat overbuilt -- not as much as in the 1980's -- but still overbuilt," Tuccillo said. Most construction is taking place in suburban markets, he noted.

Office vacancy rates slipped from 10 percent in 1997 to about 9.5 percent this year. With the exception of the South, all regions saw a decline in office vacancy rates, Tuccillo said. At the same time, office rent inflation increased about 9.8 percent this year, compared to approximately 9.2 percent in 1997. However, this varied considerably by region. Office rents in the Northeast rose about 13 percent this year, and were up around 8.8 percent in the Midwest. Year-to-year office rent increases were down slightly in the South and West. Office rent inflation this year in the South is around 8.5 percent, while in the West, it is up about 8.3 percent.

The growth in the number of shopping centers is "fairly flat," he noted. The most recent numbers (for 1997) showed the growth rate at 2 percent, down slightly from 2.2 percent in 1996. Retail sales have been stronger in 1998, but appear to be easing. "Even though shopping center construction appears to be steady, projects today tend to be small malls with semi-anchor stores -- essentially neighborhood shopping malls," Tuccillo said.

Industrial production has risen about 6 percent from levels of one year ago. However, with projections for economic growth in 1999 to be half of what it is this year, industrial production can be expected to slide to a growth rate in the 1-percent to 2-percent range next year, Tuccillo said.

Construction of industrial space has outpaced absorption, with a construction rate of approximately 1.6 percent of inventory, and absorption at 1.2 percent of inventory. "Much of this construction has been for modernization versus capacity. The industrial vacancy rate this year is approximately 7.3 percent, down very slightly from 1997. This shows a flattening out, in comparison to the earlier part of the decade, and this is a sign of some possible weakness in the future," he explained. Even so, industrial rent inflation is up from about 1.7 percent in 1997 to approximately 5.8 percent this year.

The large construction numbers this year, combined with predictions for an economic slowdown in 1999, means consumption growth will fall. "The degree of the commercial market slowdown in 1999 depends largely on the Asian financial crisis," Tuccillo noted.

One problem for the commercial sector now is a dwindling capital market, and financing has become more challenging over the last few months. "If the industry is successful in efforts to develop an efficient secondary market for commercial mortgages, we could bring more stability to this important sector of our economy by improving the flow of capital," he said.

Real Estate Investment Trusts (REITs) reached a critical mass this year. "With the turmoil on Wall Street, quality REITs will hold up in price, but marginal REITs will be hurt in value," Tuccillo said.

Technology is improving the flow of information in the commercial market just as it has in residential real estate, he added. NAR recently launched a commercial web site, http://www.CommercialSource.com, featuring 150,000 property listings around the world.

Published: November 9, 1998

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