An increase in business confidence and sustained economic growth brighten the prospects for commercial real estate, according to a forecast presented at a commercial real estate forum at the National Association of Realtors Midyear Legislative Meetings and Trade Expo. Nearly 8,000 Realtors and guests attended the meetings last week.

David Lereah, the association's chief economist, said many other indicators point to a commercial market recovery. "Durable goods orders have been trending up, manufacturers are hiring again and payroll data is on the rise," he said. "Business spending will continue to grow and that will directly feed into a rising demand for commercial real estate space."

The overall commercial real estate market should experience positive net absorption of space this year, which includes leasing of new space coming on the market as well as space in existing properties.

The National Association of Realtors analysis of the office, retail, warehouse and multifamily markets was produced using data provided by Property & Portfolio Research, which provides independent real estate research and portfolio strategy services to the institutional real estate community.

"With office employment starting to recover, space absorption is coming back to match supply and vacancy rates are stabilizing," Lereah said. With the office vacancy rate projected to decline 0.9 percentage points to 17.0 percent in 2004, rents should be fairly stable this year, slipping less than a percentage point, before growing 3.5 percent in 2005.

In the retail sector, Lereah said, consumer spending is holding on. "Retail sales have been accelerating, and there's been little change in vacancy rates, but retail rents are growing," he said. Vacancy rates are forecast to drop a half of a percentage point this year to 12.4 percent, supporting a 1.6 percent increase in rent in 2004 and a growth of 1.8 percent in 2005.

The warehouse market has experienced inventory depletion, and there are now signs of restocking. "Warehouse absorption is matching the supply of new space coming on the market," Lereah said. Rents should increase only 0.5 percent this year before rising 1.7 percent in 2005.

The apartment rental market—multifamily housing—has been hit by a combination of job losses and people moving from rental into homeownership.

"The good news is the job market is recovering and echo boomers—the children of the baby boom generation—are forming households and have a need for housing," Lereah said. "In addition, there is rental demand from immigrant households." Vacancy rates should decline 0.3 percentage points this year to 6.8 percent, while apartment rents should rise slightly before increasing 2.3 percent in 2005.

Information provided in this column is presented by the Realtor members of the Silicon Valley Association of Realtors at www.silvar.org. Send questions on any topic to jnewton@jnpr.com.