Washington, D.C.--With the exception of the apartment rental market, which continues to benefit from weak home sales, all commercial real estate property types are showing grim results for 2008, with an equally grim forecast for 2009, according to the Commercial Real Estate Outlook of the National Association of Realtors (NAR).

“If anything, multifamily is the bright spot,” George Ratiu, economist at NAR Research, tells MHN. “This is in large part due to a high number of foreclosures, and the fact that people still need housing, no matter what is going on in the economy.”

Demand for this sector, Ratiu says, “is healthy with rent growth being positive, if not stellar.” NAR forecasts multifamily vacancy rates for the third quarter of 2009 at 5.8 percent, unchanged from the third quarter of this year, which is still low compared with other sectors.

Markets with the tightest vacancies include San Diego, northern New Jersey and Boston, with vacancy rates of 4.2 percent or less. Areas with the highest vacancies include Jacksonville, Fla.; Phoenix; and Orlando, Fla., with vacancies of 8.5 percent or higher.

The outlook also shows that with the exception of cash transactions, investment activity in commercial real estate sectors is nearly at a standstill because commercial lending has essentially halted, while job losses are curtailing the demand for space.

“To a large extent, this is true for the multifamily sector as well,” says Ratiu. According to NAR’s research, multifamily lending stood at $9.7 billion in the third quarter of 2008 but is expected to drop to $1.5 billion in the fourth quarter, according to estimates made by NAR. “This is a significant drop because financing has pretty much come to a standstill. This is mainly because of a lack of financing. Also, there is a wave of refinancing across the country but very little capital going around,” says Ratiu.

Lawrence Yun, NAR chief economist, says there are serious structural problems in commercial lending. “Although access to residential mortgages has improved, the opposite is true for commercial loans,” he says. “We need liquidity for commercial mortgage-backed securities not only to free the market, but also to rollover existing debt. At the same time, the loss of jobs has had a significant impact on the demand for commercial space.”

Yun added that default rates on commercial real estate loans are very low by historical standards. “However, commercial defaults could deteriorate significantly without a properly structured stimulus that addresses liquidity for commercial mortgages,” he said.

The year 2009 is expected to fare better, according to Raiu, with demand going further up. “This is partly because single-family construction has pretty much halted, and with mortgage being extremely difficult to get, people are turning toward multifamily housing.

In addition, with the economy being where it is, and home prices falling, consumer confidence is down and people are wary of buying, not knowing when the bottom will be reached.”

All this is having a modest impact on rent increases. “On an average, rent is expected to increase 2.8 percent in 2009 as opposed to 2.9 percent in 2008, 3.1 percent in 2007 and 4.1 percent in 2006,” says Ratiu.

Multifamily net absorption is expected to be 24,400 units in 59 tracked metro areas this year and 142,000 in 2009, according to the NAR Outlook.

Source: Multifamily Housing News, December 17, 2008