Commercial Real Estate Outlook - November 2010

1. COMMERCIAL REAL ESTATE
OUTLOOK
NOVEMBER 2010
By George Ratiu, NAR Economist
The third quarter economic activity
maintained the moderate positive
momentum it has been building over the
past year. Consumer spending continued to
surprise with its resiliency in the face of
stubbornly high unemployment. But
questions about the direction of the
economy remain, as evidenced by the
Federal Reserve’s second round of
quantitative easing measures (QE2) as well
as the condition of commercial real estate.
Economic Activity
Based on the Bureau of Economic
Analysis’s second estimate, gross domestic
product (GDP) rose 2.5 percent in the third
quarter. Mirroring the second quarter’s
patterns, all major components—except net
exports—advanced. The gains were driven
by double-digit growth in business
investments, along with sustained
expenditures by consumers and
government. Business spending increased
12.4 percent during the quarter. While
taking a slower pace compared with the first
half of the year, businesses continued to
spend on equipment—software and
transportation were up 15.2 percent and
64.0 percent, respectively. Contrary to
BEA’s first estimate, after eight consecutive
quarters of declines, business spending on
commercial real estate declined 5.8 percent.
The major economic driver, consumer
spending stayed the course, gaining 2.8
percent during the third quarter.
Consumers increased their spending on
both goods and services, particularly for
recreation and recreational goods, home
furnishings, transportation and health care.
International trade expanded during the
quarter, as well. The balance of trade
remained negative, however, as imports
grew by 16.8 percent and exports by 6.3
percent. The other major component of
GDP—government spending—advanced
4.0 percent, mostly at the federal level.
(continued on page 2)
Commercial real estate markets are
flattening out, with modestly improving
fundamentals expected in 2011. Rents are
expected to continue to decline, as
vacancies remain elevated. Multifamily
performance has proven resilient and is
expected to lead into 2011.
Economic Activity Maintains Momentum in Third Quarter
Market Fundamentals
2010.Q3>2010.Q4
OFFICE
Vacancy
Net Absorption
Completions
Rent Growth
INDUSTRIAL
Vacancy
Net Absorption
Completions
Rent Growth
RETAIL
Vacancy
Net Absorption
Completions
Rent Growth
MULTIFAMILY
Vacancy
Net Absorption
Completions
Rent Growth
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
GDP (% Chg - Annual Rate)
Source: BLS

2. COMMERCIAL REAL ESTATE
OUTLOOK
2
(continued from page 1)
Employment
After a strong first half of 2010, employment trends took a
dive during the third quarter. Businesses, while still
spending, are doing so more targeted and not on jobs.
While corporate profits are back up to their peak before
the recession, companies are just sitting on cash and not
actively pursuing expansion plans. The number of payroll
jobs declined by 53,000 for the period. The decline was
somewhat offset in October, when the economy added
151,000 jobs. But, employment conditions remain mired
in uncertainty. The first-time unemployment insurance
claims have been stuck at around 450,000 per week. The
figure needs to fall below 400,000 per week to ensure a
meaningful, consistent job creation. In addition, the
number of people drawing unemployment benefits stayed
above 4.5 million. Not surprisingly, the unemployment
rate has been fixed at 9.6 percent for three months.
Given the tepid pace of recovery and the employment
picture, consumers remained uncertain. In addition, the
midterm elections provided an added measure of volatility
to consumers’ mood. The two main measures of
consumer confidence and sentiment mirrored these
trends. The consumer confidence index compiled by the
Conference Board—a measure that considers
respondents’ general feelings about the job market and
their finances—declined from a high of 62.7 in May to
48.6 in September, the second lowest value for the year.
More troubling, consumers’ expectations are also on the
decline, after a burst of optimism during the first half.
Meanwhile, the University of Michigan survey of
consumer sentiment also declined during the third
quarter, to close at 68.2 in September. It has risen
slightly to 69.3 during November, but remains well below
the 100 value typical of economic expansions.
Commercial Lending
Commercial sales transactions are slowly rising.
However, the commercial markets are starting to
experience a bifurcation along property values. While
investment capital appears ready to deal at the high-end
of the market, the smaller size investments and
businesses are still finding little room to maneuver.
With fundamentals on an upward trend, larger properties
in stronger markets are attracting investor interest. At the
same time, smaller properties in slower markets continue
to display signs of distress.
Commercial Realtors cite lack of financing as the main
obstacle to a broad market recovery. Commercial loan
originations are down 83 percent from peak, lending
standards remain stringent and, faced with other
investment alternatives, banks remain wary of
commercial transactions. The QE2 attempt to keep long-
term rates lower, which may or may not be working, is
inconsequential to the market compared to the
importance of returning lending standards to normal from
their overly stringent current rules. For the time being,
buyers with cash are facing few, if any, competitors in
bidding for a building.
Outlook
The third quarter survey mirrors a weak-yet-hopeful
commercial real estate market. While the economy
grows, high unemployment continues to figure
prominently in the minds of both consumers and
businesses, driving spending decisions. With the
knowledge that the midterm elections brought changes in
Congress and major legislative issues are still pending,
the fourth quarter will likely give a clearer indication of
what lies ahead, especially looking at 2011.
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010
-1000
-800
-600
-400
-200
0
200
400
600
2008-Jan
2008-Mar
2008-May
2008-Jul
2008-Sep
2008-Nov
2009-Jan
2009-Mar
2009-May
2009-Jul
2009-Sep
2009-Nov
2010-Jan
2010-Mar
2010-May
2010-Jul
2010-Sep
Payroll Employment (Monthly Chg, '000s)
Source: BLS

3. COMMERCIAL REAL ESTATE
OUTLOOK
3
Annual Growth
Rates (%)
2010 I 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2009 2010 2011 2012
Real GDP 3.7 1.7 2.0 1.8 2.1 2.1 1.8 2.4 3.1 3.1 -2.6 2.7 2.0 2.8
Nonfarm
Payroll
Employment
0.2 2.2 -0.3 2.5 0.8 1.2 0.8 0.5 1.1 1.2 -4.3 -0.4 1.1 1.1
Consumer
Prices
1.5 -0.7 1.5 2.2 2.2 2.6 2.2 1.8 1.7 2.0 -0.3 1.6 1.9 1.9
Real
Disposable
Income
1.3 4.4 0.5 0.7 -0.6 1.1 1.1 1.5 3.2 2.7 0.6 1.1 0.8 2.4
Consumer
Confidence
52 58 51 52 53 54 55 58 61 61 45 53 55 63
Unemploymen
t (%)
9.7 9.7 9.6 9.8 9.8 9.7 9.6 9.5 9.4 9.3 9.3 9.7 9.7 9.3
Interest Rates
(%)
2010 I 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2012 I 2012 II 2009 2010 2011 2012
Fed Funds
Rate
0.1 0.2 0.2 0.1 0.1 0.3 0.5 1.0 1.5 1.8 0.2 0.2 0.5 2.0
3-Month T-Bill
Rate
0.1 0.1 0.2 0.4 0.4 0.7 0.9 1.3 1.7 1.9 0.2 0.2 0.8 2.1
Prime Rate 3.3 3.3 3.3 3.1 3.2 3.2 3.6 4.0 4.6 5.3 3.3 3.2 3.5 5.0
Corporate Aaa
Bond Yield
5.3 5.0 4.6 4.2 4.3 4.6 4.7 4.9 5.1 5.4 5.3 4.8 4.6 5.4
10-Year
Government
Bond
3.7 3.5 2.8 2.7 2.9 3.2 3.4 3.6 3.9 4.1 3.3 3.2 3.3 4.2
30-Year
Government
Bond
4.6 4.4 3.9 3.6 3.8 4.1 4.3 4.5 4.7 4.9 4.1 4.1 4.2 4.9
Source: National Association of REALTORS®
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010

4. COMMERCIAL REAL ESTATE
OUTLOOK
4
OFFICE 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011
Vacancy Rate 16.7% 16.6% 16.7% 16.8% 16.8% 16.6% 16.4% 15.7% 16.7% 16.7%
Net Absorption
('000 sq. ft.) 3,042 6,705 -2,353 1,128 2,357 5,723 7,155 -38,106 -3,705 16,363
Completions ('000
sq. ft.) 5,611 3,585 2,824 4,952 1,771 180 396 52,787 21,708 7,299
Inventory ('000,000
sq. ft.) 3,574 3,575 3,576 3,581 3,583 3,583 3,583 3,572 3,576 3,583
Rent Growth -0.5% -0.3% -0.4% -0.4% -0.4% -0.4% -0.4% -12.7% -1.8% -1.6%
INDUSTRIAL 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011
Vacancy Rate 14.1% 14.0% 13.9% 13.8% 13.6% 13.4% 13.2% 13.2% 14.1% 13.5%
Net Absorption
('000 sq. ft.) -5,186 10,459 14,382 23,937 30,851 36,562 42,613 -258,071 -25,074 133,963
Completions ('000
sq. ft.) 6,551 2,639 5,702 3,087 10,676 11,604 14,717 70,082 27,192 40,084
Inventory ('000,000
sq. ft.) 13,167 13,169 13,174 13,177 13,188 13,199 13,214 13,110 13,174 13,214
Rent Growth -1.3% -0.4% -1.2% -0.9% -0.9% -0.9% -0.7% -10.9% -4.0% -3.4%
RETAIL 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011
Vacancy Rate 13.1% 13.1% 13.1% 13.1% 13.1% 13.0% 13.0% 12.0% 13.1% 13.1%
Net Absorption
('000 sq. ft.) -637 994 179 595 1,045 1,484 1,907 -18,325 -481 5,031
Completions ('000
sq. ft.) 762 743 1,252 1,323 1,019 319 1,734 12,034 4,024 4,395
Inventory ('000,000
sq. ft.) 1,644 1,645 1,646 1,647 1,648 1,649 1,651 1,659 1,646 1,651
Rent Growth -1.0% -1.1% -0.6% -0.3% -0.1% 0.0% 0.1% -4.0% -3.4% -0.3%
MULTI-FAMILY 2010 II 2010 III 2010 IV 2011 I 2011 II 2011 III 2011 IV 2009 2010 2011
Vacancy Rate 6.0% 5.8% 6.4% 6.2% 5.8% 5.3% 5.8% 7.4% 6.4% 5.8%
Net Absorption
(Units) 90,474 39,651 -72,149 46,563 65,728 82,251 -47,590 105,458 85,173 146,952
Completions (Units) 15,193 12,339 11,012 11,580 12,501 14,647 17,076 177,589 59,461 55,804
Inventory
(Units in millions) 14.5 14.5 14.5 14.5 14.5 14.5 14.5 14.4 14.5 14.5
Rent Growth -0.1% 0.4% 0.2% 0.3% 0.3% 0.4% 0.4% -3.6% 0.2% 1.4%
Source: National Association of REALTORS®/CBRE-Econometric Advisors
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010

5. COMMERCIAL REAL ESTATE
OUTLOOK
5
Office Industrial Retail Multifamily
Albuquerque, NM 18.4% 12.8% 12.6% 6.0%
Atlanta, GA 21.2% 18.6% 16.5% 9.6%
Austin, TX 17.6% 15.8% 12.3% 6.5%
Baltimore, MD 15.7% 15.4% 10.1% 5.4%
Boston, MA 13.2% 17.6% 10.1% 4.2%
Charlotte, NC 19.0% 15.9% 15.1% 7.4%
Chicago, IL 16.3% 14.9% 13.9% 6.0%
Cincinnati, OH 18.3% 12.9% 18.6% 7.9%
Cleveland, OH 18.3% 12.1% 17.4% 7.3%
Columbus, OH 17.7% 15.7% 17.3% 6.6%
Dallas, TX 22.5% 15.8% 16.9% 8.5%
Denver, CO 16.8% 12.4% 13.0% 5.8%
Detroit, MI 25.7% 20.6% 17.7% 8.5%
Fort Lauderdale, FL 17.0% 12.5% 12.4% 5.1%
Fort Worth, TX 15.1% 15.1% 17.0% 9.2%
Hartford, CT 19.5% 17.5%
Honolulu, HI 9.1% 7.8% 6.9%
Houston, TX 17.2% 10.7% 14.0% 10.3%
Indianapolis, IN 16.6% 12.6% 18.0% 9.0%
Jacksonville, FL 22.0% 15.2% 15.0% 10.1%
Kansas City, MO 16.8% 10.3% 18.5% 7.8%
Las Vegas, NV 24.9% 13.6% 17.6% 8.5%
Long Island, NY 17.6% 11.0% 8.0%
Los Angeles, CA 11.6% 8.0% 8.6% 5.7%
Miami, FL 14.4% 12.4% 8.3% 4.0%
Milwaukee, WI 19.1% 14.3%
Minneapolis, MN 20.2% 12.2% 13.9% 4.8%
Nashville, TN 14.0% 15.5% 12.4% 5.8%
New York, NY 8.8% 11.7% 8.6% 5.6%
Newark, NJ 15.7% 13.4% 4.9%
Oakland, CA 17.8% 14.2% 8.6% 4.6%
Orange County, CA 19.8% 11.1% 7.8% 5.0%
Orlando, FL 17.7% 15.9% 14.6% 7.3%
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010

6. COMMERCIAL REAL ESTATE
OUTLOOK
6
Office Industrial Retail Multifamily
Philadelphia, PA 15.2% 13.5% 13.1% 5.2%
Phoenix, AZ 25.9% 18.2% 16.6% 8.9%
Pittsburgh, PA 11.4% 5.4%
Portland, OR 16.5% 10.7% 12.1% 4.2%
Raleigh, NC 14.9% 5.6%
Riverside, CA 22.4% 15.4% 14.5% 6.2%
Sacramento, CA 21.9% 18.4% 15.6% 7.4%
Salt Lake City, UT 16.6% 9.2% 15.8% 5.6%
San Diego, CA 18.9% 14.9% 10.5% 4.6%
San Francisco, CA 14.1% 10.6% 7.0% 4.9%
San Jose, CA 24.1% 14.6% 8.0% 3.4%
Seattle, WA 16.8% 11.2% 12.2% 4.9%
St. Louis, MO 15.9% 14.0% 14.5% 8.3%
Stamford, CT 12.8% 19.9%
Tampa, FL 23.2% 13.4% 12.7% 7.8%
Tucson, AZ 16.9% 12.8% 16.8% 8.1%
Ventura, CA 18.4% 12.3% 10.5%
Washington, DC 12.8% 15.2% 8.9% 4.6%
West Palm Beach, FL 21.1% 14.3% 13.3% 5.3%
Wilmington, DE 18.5% 13.7% 14.5%
National Averages* 16.7% 13.9% 13.1% 6.4%
*Not all markets are represented in chart above.
Source: NAR / CBRE-EA
NATIONAL 3.86%
OFFICE 3.12%
INDUSTRIAL 2.80%
RETAIL 3.39%
APARTMENT 6.04%
Source: National Council of Real Estate Investment Fiduciaries
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010

7. COMMERCIAL REAL ESTATE
OUTLOOK
7
October 2010 – More than 400 SIOR market experts across
the country weighed in on industrial and office market
conditions for the Third Quarter 2010 SIOR Commercial Real
Estate Index. The responses, compiled by the SOCIETY OF
INDUSTRIAL AND OFFICE REALTORS (SIOR) in
association with the NATIONAL ASSOCIATION OF
REALTORS (NAR), present an accurate depiction of the
current industry as fall approaches.
The SIOR Index gained 1.6 points during third quarter 2010.
The SIOR Index, which measures 10 variables pertinent to
the performance of U.S. industrial and office markets (see
Methodology), rose again in the third quarter 2010,
advancing to reach 42.6—100 points signifies a balanced
market. Equilibrium has not been experienced (100 points)
since the third quarter of 2007.
For the past three quarters the market has been on a
gradual but steady incline. The Index has now reached the
level it was at in the beginning of 2009. Both the industrial
and office sectors realized gains once again. When asked
about the outlook of the next three months, 59 percent of
SIORs expected an improvement in the market, an increase
of 2 percent from last quarter.
Overall, vacancy rates are continuing to slowly improve,
however rents still remain low and subleasing space is still
high in this tenant market. Fewer respondents feel that
asking rents are below where they were a year ago, and
fewer SIORs feel that vacancy rates are higher than a year
ago.
Development remains stagnant in all regions and
investments are still low, but on the positive side,
development acquisitions and leasing activity are beginning
to grow in many parts of the country. Development
acquisitions are improving, as 96 percent of SIOR
respondents feel it is a buyer’s market as opposed to 97
percent last quarter.
Although SIOR members continue to report that the national
economic recession is significantly impacting local industrial
and office markets, several market indicators show signs of
leveling-off, and others, especially the Mid-West, are even
posting improvements. Fewer respondents today feel that
the national economy is having a negative impact on their
local market.
The vacancy rates are improving in all regions, however
there is still ample sublease space available and
concessions continue to make it a tenant’s market.
Practitioners from the Midwest are experiencing higher
vacancy rates than a year ago, and the South is posting
better results both in vacancy rates and leasing activity.
Development activity continues to be at a standstill across
the country, with the West, Midwest and South close to an
actual value of zero. Although construction is non existent,
SIORs say there are plenty of deals available for sites.
Office Market
The market improvements are visible more in lower levels of
tenant concessions in office markets, and leasing activity
and rental rates for the office market are slightly stronger
than the industrial market. However, the office market
continues to have more sublease space and higher vacancy
rates, and prospects for the next three months are lower for
office practitioners.
Industrial Market
The industrial marketplace has leasing activity below
historical levels, rental rates in a steeper decline, tenant
concessions from landlords at higher levels, sales prices
falling, and close to zero construction taking place. The
national economy is clearly having a negative impact on the
local markets, but more so for industrial practitioners.
Regional Breakdown
The West (36.8 points) improved by 1.9 points, however it
continues to suffer from weak local economic conditions,
excess sublease space, a deep level of concessions, and
falling prices. SIOR respondents in the West scored the
lowest outlook of all regions for the next quarter.
The South (47 points) saw the greatest improvement, rising
by three points, posting stronger leasing activity and better
vacancy rates. Local economies in the South are continuing
to fare comparatively better than other regions, although
development is still at a standstill.
The Northeast (45.7 points), gained less than a point since
last quarter, the smallest gain out of all regions. It posted
better vacancy rates, sublease space that is closing in on
normal, and more stable sales prices than other regions.
The Mid-West (42 points) improved by 1.3 points.
Development and activity still remains near zero, and it
continues to be a buyer’s market. However, the Midwest is
close to normal conditions for subleasing space.
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010

8. COMMERCIAL REAL ESTATE
OUTLOOK
8
OFFICE
Region Average Cap Rate Average Price ($/Sq. Ft.)
Mid-Atlantic 5.7% $409
Midwest 6.8% $101
Northeast 5.8% $361
Southeast 6.8% $107
Southwest 8.0% $144
West 7.8% $207
INDUSTRIAL
Region Average Cap Rate Average Price ($/Sq. Ft.)
Mid-Atlantic 9.5% $60
Midwest 7.2% $51
Northeast - $72
Southeast 8.8% $43
Southwest 8.5% $59
West 8.4% $76
RETAIL
Region Average Cap Rate Average Price ($/Sq. Ft.)
Mid-Atlantic 8.0% $215
Midwest 8.3% $68
Northeast 6.2% $569
Southeast 8.4% $129
Southwest 7.3% $132
West 7.6% $238
MULTI-FAMILY
Region Average Cap Rate Average Price ($/Unit)
Mid-Atlantic 8.1% $124,642
Midwest 6.2% $36,931
Northeast 5.6% $171,048
Southeast 7.3% $90,361
Southwest 7.3% $91,757
West 5.9% $195,878
Note: Data based on sales closed in 2010.Q4 through October
Source: Real Capital Analytics
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010
$0
$5
$10
2009Q3 2009Q4 2010Q1 2010Q2 2010Q3
Billions
Office Sales Volume
$0
$2
$4
$6
2009Q3 2009Q4 2010Q1 2010Q2 2010Q3
Billions
Industrial Sales Volume
$0
$5
$10
2009Q3 2009Q4 2010Q1 2010Q2 2010Q3
Billions
Retail Sales Volume
$0
$5
$10
2009Q3 2009Q4 2010Q1 2010Q2 2010Q3
Billions
Multifamily Sales Volume

9. COMMERCIAL REAL ESTATE
OUTLOOK
9
THE NATIONAL ASSOCIATION OF REALTORS®, “The Voice for Real Estate,” is
America’s largest trade association, representing 1.1 million members involved in
all aspects of the residential and commercial real estate industries..
The Research Division of the National Association of REALTORS® monitors and
analyzes monthly and quarterly economic indicators, including retail sales,
industrial production, producer price index, gross domestic product and
employment data that clearly impact commercial markets over time. In addition,
the Research Division provides several products covering commercial real estate:
• Commercial Member Profile
• Commercial Real Estate Quarterly Market Survey
For more information, please visit us at www.realtors.org/research. If you have
questions or comments regarding this report or any other commercial real estate
research, please contact George Ratiu, NAR Economist, at gratiu@realtors.org.
Although the information presented in this report has been obtained from reliable
sources, NAR does not guarantee its accuracy, and such information may be
incomplete. This report is for information purposes only. All opinions, assumptions
and estimates constitute NAR’s judgment as of the date of this publication and are
subject to change and evolving events. Actual results may vary from forecast
results.
NATIONAL ASSOCIATION OF REALTORS®
Research Division
500 New Jersey Avenue, NW
Washington, DC 20001
Copyright© 2010 NATIONAL ASSOCIATION OF REALTORS®. Reproduction,
reprinting or retransmission in any form is prohibited without written permission. For
questions regarding this matter please e-mail eresearch@realtors.org.
NATIONAL
ASSOCIATION of
REALTORS®
RESEARCH
NOVEMBER 2010