Commercial real estate headed for a year

of records

Increases in rental and occupancy rates are helping push

deals to new highs

By Daniel Taub
BLOOMBERG NEWS
Friday, December 15, 2006

U.S. commercial real estate investment is likely to set a record this year, driven by rising rents and occupancies in office and industrial buildings, the National Association of Realtors said.

More than $236 billion in commercial real estate transactions were recorded in the first 10 months of 2006, up from $231.9 billion a year earlier, the association said in its Commercial Real Estate Outlook report.

Blackstone Group LP's agreement in November to acquire Equity Office Properties Trust, the biggest office landlord in the U.S., for $20 billion, isn't included in the data.

"It bodes well for the commercial real estate industry that you have these behemoths acquiring properties, particularly office,'' said Scott Macintosh, a senior economist with the association.

Rising employment and trade are providing a boost to commercial landlords, the association said. Rising employment fuels demand for office space, and increased trade boosts demand for warehouses and distribution centers.

Office transactions have accounted for 48 percent of investment in all commercial real estate sectors this year, with more than $105 billion in properties changing hands in the first 10 months, the association said. That's up 36 percent from a year earlier.

The big transactions included the $188 million sale of the Frost Bank Tower in Austin to Equity.

Office transactions this year have been fueled by acquisitions of entire portfolios, leveraged buyouts of real estate investment trusts and mergers within the industry, the association said.

The purchase of Chicago-based Equity Office Properties by Blackstone was worth $36 billion, including the assumption of debt, making it the biggest buyout in history.

Last week, Reckson Associates Realty Corp. shareholders approved the sale of the company for $3.8 billion to SL Green Realty Corp.

U.S. office vacancy rates probably will drop to an average of 12.1 percent by the fourth quarter of next year from 12.9 percent today, the association said. The current vacancy rate is the lowest since 2001. Rents probably will increase 5.2 percent in 2007 after rising 4.3 percent this year, the group said.

"The office-using sectors, the financial sectors, seem to be ramping up," Macintosh said. "Maybe manufacturing and other job sectors are not as robust, but financial sectors certainly are, and they're office users."

Vacancy rates in the industrial market are also at five-year lows and are forecast to average 9 percent by the fourth quarter of next year, down from 9.5 percent today, the association said. Warehouse, distribution center and other industrial transactions totaled $32 billion in the first 10 months, up from $28 billion a year earlier and on its way to a record this year.

Transactions in the apartment market, meanwhile, dropped to $68 billion through October, from $70.1 billion a year earlier.

The retail market also had a drop in transactions, with a total volume of $33.8 billion in the first 10 months of 2006, down from $41.1 billion a year earlier.

Retail landlords have been hurt by vacancies in regional malls resulting from Federated Department Stores Inc. closing some locations after buying May Department Stores Co. for $11 billion last year.