Grubb & Ellis 2012 Forecast: Commercial Real Estate Sales Could Rise 25%
Grubb & Ellis foresees slow yet steady growth in commercial real estate property sectors this year according to its new 2012 national real estate forecast report.
Grubb & Ellis (1/5/2012)

"The wild card this year is the unresolved European debt crisis, which has the potential to send lenders and investors to the sidelines," said Robert Bach, chief economist for the noted real estate services and investment company based in Santa Ana, CA. "If they stay in the game, expect overall commercial real estate sales to rise 25 percent in 2012, generating marginally lower cap rates for non-distressed assets."

The gradual improvement in leasing markets and boost in investment sales volume is based upon an assumption of GDP growth in the range of 2 to 2.5 percent in 2012, noted Bach, "and an average of 125,000 net new payroll jobs per month."

What follows are cherry-picked commentary about industrial and office market data pulled from the complete 50-page report, found online at www.grubb-ellis.com/Forecast2012.

Industrial real estate: This market did "quite a bit better than expected, with absorption nearly double our forecast," said report authors. "Vacancy ended the year at 9.5 percent."

Demand for this type of property "accelerated significantly" in 2011. Moreover, total net absorption of 110 million sq. ft. "compares favorably to the 34 million sq. ft. absorbed in 2010 and especially to the 64 million sq. ft. absorbed two years into the recovery following the 2001 recession."

The greatest milestone achieved in 2011? The leasing of all space that "went vacant" due to the recession. During the six quarters of negative net absorption, 153 million sq. ft. was returned to the market compared with nearly 160 million sq. ft. re-absorbed between second quarter 2010 and fourth quarter 2011. "This strong performance is especially significant considering that economic growth slowed to less than 2 percent during 2011."

The recovery was not as widespread in terms of product type. Warehouse/ distribution space captured 75 percent of total demand while accounting for only 50 percent of total inventory. Class A logistics space (subset of warehouse/distribution) comprised 20 percent of total industrial inventory but half of demand in 2011.

"Smaller, second-generation warehouse spaces struggled to attract tenants throughout the year despite aggressive concession packages and depressed rent levels." And although "new supply was constrained" throughout 2011, "signs of acceleration became apparent" by year-end.

Some of the report's predictions include:


Office real estate: This market performed "a bit better than the half-speed recovery we had expected-call it a two-thirds speed recovery," noted the report's authors. "The vacancy rate ended the year at 16.8 percent, 20 basis points below our forecast..Absorption, completions and rental rates all came in slightly better than expected."

The office market recovery accelerated in 2011 "but only to about 30 in a 45-mile per-hour zone, leaving motorists frustrated." The vacancy rate fell 90 basis points, ending the year at 16.8 percent-and falling short of the 200-basis-point decline that is the norm for a steady recovery.

Net absorption last year totaled 38 million sq. ft.; well ahead of the 9 million sq. ft. registered in 2010 but trailing the 62 million sq. ft. posted in 2007, the last year of the expansion. The only market firmly in the expansion cycle was Washington, D.C., where developers delivered 18 new buildings with a combined 2.9 million sq. ft. of space, nearly two-thirds of it pre-leased.

In many markets, tenants continued to choose shorter-term (sub-five year) leases in order to keep their options open.

Some of the report's predictions include:


President/CEO Thomas D'Arcy noted in the report that "continued weakness in the overall economy, defensive lenders, an uncertain capital environment, bifurcated property values, high unemployment and low consumer and business confidence continue to plague the industry and have made it difficult to plan for the future."

However, he added that "in times like these, the bold turn opportunities into long-term value."