Looking Up: Trends in the Commercial Real Estate Market

Posted by Title Source

 

While the residential real estate market is just starting to find its stride, commercial real estate has been red hot in several areas across the country for the last several years. Despite its brisk pace, the market isn’t showing signs of losing steam.

Things Are Big in Texas

 

Last year, Texas dominated the U.S. commercial real estate sector and signs point to the trend continuing. The Dallas Morning News said a North Texas boom across multiple commercial property sectors was responsible for putting the state in the top spot according to a report by NAIOP, the Commercial Real Estate Development Association.
The state’s direct commercial real estate expenditures totaled almost $42 billion in 2014. California, last year’s second-best commercial market, didn’t come close, racking up a mere $13 billion in commercial expenditures.

Texas also boasts a large workforce tied to the current boom. An estimated 776,000 Texas jobs were derived in whole or in part from commercial real estate in 2014. Nationwide, the NAIOP estimates that the industry supports about four million jobs.
The Lone Star market doesn’t show signs of a slowdown in the near future. “It might be 2018 before we see another downturn,” Walter Bialas, a research director with Dallas commercial real estate firm JLL, told the Dallas Morning News. “We are at a really good place in the market in North Texas.” 

New York City on Track to Set Sales Record

Meanwhile, New York City is on pace to set a new commercial real estate sales record for 2015. New York Daily News says sales volume of land and existing buildings in the city is expected to top $75 billion this year, according to a report from the commercial brokerage Cushman & Wakefield. The previous record of $62.2 billion was set in 2007. 
Demand for properties in Brooklyn has been particularly high this year. The borough is on track for $9 billion worth of closed deals in 2015, up more than 30 percent over last year. Cushman & Wakefield’s Bob Knakal told the paper that $4.3 million was the average price for a building in the second quarter, a price jump of 40 percent over the last year.
Manhattan’s more saturated commercial market wasn’t too far behind, with $8.53 billion in commercial deals expected this year. Prices have shot up as well – for 2015, the average has reached $665 per buildable square foot, compared to last year’s average of $587 and a price of $446 per buildable square foot in 2013.

Fed Chair Eying Price Increases Closely

Such leapfrogging price increases haven’t gone unnoticed. The latest pricing boom has caught the eye of Federal Reserve Chair Janet Yellen, who is watching matters closely.
Earlier this month, Yellen’s semiannual report to Congress made note of the market’s rapid commercial real estate price increases, reports the Dow Jones Business News. “Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly, and underwriting standards at banks and in commercial mortgage-backed securities have been loosening.” Though the commercial market was identified as an area of concern, the wider U.S. economy is experiencing a moderation of risks to financial stability.

Wider Commercial Trends

For the wider commercial real estate market, the biggest moves are likely to take place in the rental, office, and retail sectors. Reis, the commercial real estate research organization, notes the national vacancy rate of 4.2 isn’t expected to drop much by year’s end. A still “insanely tight” vacancy rate of 4.8 is predicted by 2016, despite a “flurry of new buildings” expected to open to tenants in the second and third quarters.
The company’s latest report also touches on millennial trends. Noting that while they haven’t yet gotten on board with homeownership the same way previous generations did, reports do indicate rental vacancies in central business districts are lower than those in the suburbs. Reis suggests that as millennials begin to start families, they may still move to the suburbs just as their predecessors did. 
Office and retail sectors are also trending up, though at a slower average pace. Reis reports that office vacancies were down to 16.6 percent in the first quarter of 2015 while asking and effective rents were up by 0.9 percent and one percent, respectively. If economic growth hits predicted levels, the vacancy rate could dip even lower.
In the retail sector, vacancies were down to 10.1 percent, while asking and effective rates were up by 0.5 percent. New construction and big changes in the vacancy rate aren’t expected in this sector, owing to the retail dominance of e-commerce. The trend looks set to continue.

Commercial Title Insurance Remains a Good Investment

With such a bustling commercial market, commercial title insurance continues to be a good investment for developers and buyers. Some issues affecting the sector can resemble those of the residential market, such as tax record errors or survey errors. However, there are also commercial title issues that are less commonly seen in the residential sector, such as:
     Expired powers of attorney

 

     Misinterpretation of wills or documents

 

     Deeds by unauthorized parties

With the volume of deals from the current commercial boom, developers and buyers may find themselves running into such issues more frequently. Title insurance remains a buyer’s best bet in minimizing or avoiding these risks altogether.


Click here to discover how Title Source National Commercial is the prime choice for title, escrow, appraisal and survey management needs.

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