Commercial Real Estate Firms Are Positive About 2006

TCN Worldwide—ranked as one of the largest commercial real estate organizations in the world—recently held its western regional meeting in Las Vegas. Affiliates from around the west attended, including San Francisco’s Starboard TCN Worldwide.

Firms representing most major markets reported strong first quarter sales and leasing activity:

• The office market continues to be rebounding nicely, with an average vacancy rate of 9%.
• Industrial properties are in strong demand, with a vacancy rate of 12%.
• The retail market, including single-tenant buildings strip and shopping centers, has a vacancy rate in the 8% range.
• Rental rates are expected to increase above the C.P.I. (consumer price index) for the second year in a row in all commercial property categories.

On the sales side, the abundance of capital combined with little product to purchase will continue to keep the commercial sales market hot this year. Increasing interest rates, which put pressure on cap rates to rise, may stimulate this market even more later on in the year.

Continued increases in tenant improvement costs were seen as a potential threat to the current commercial boom. Skyrocketing tenant improvement costs, including both raw materials and labor costs, put pressure on landlords as well as tenants to make the economics of a deal work for both parties. As a result, landlords are expected to continue to ask for large security deposits to help reduce the amount of up-front costs associated with commercial real estate leasing in today’s market.

One market that is expected to see a major correction in the coming year is the condo conversion market. With many condo units coming on the market, new projects are being put on hold or even scrapped due to an anticipated down slide in the housing sales market. This could have a negative effect on the office and industrial market, which saw many of these types of buildings converted to residential units in the past several years. If in fact the condo market begins to slow down dramatically, these conversions may stop altogether. Conversions have contributed to the drop in overall office and industrial vacancy rates over the last several years, so this could have a huge impact on that market.

However, overall the news was positive, and most commercial brokers feel that the good times will continue to roll.