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CRE Finance World, Summer 2012

Risks to Recovery in Commercial Real Estate This chart shows vacancy rate trends for different retail property Effective Rent Growth & Vacancy Patterns for subtypes, indexed to the first quarter of 2008. A trend towards Flex/R&D Properties vacancy declines starting at or around mid-2011 is evident, although Figure 4 the sector has some way to go before occupancies improve to Effective Rent Growth & Vacancy Patterns for Flex/R&D Properties levels last observed in early 2008, when the recession began. Figure 3 Source: Reis, Inc. Warehouse and distribution facilities also showed some improvement in occupancies, with vacancies also ending 30 basis points lower versus the third quarter, at 13.1%. Both subsectors appear to be well on their way to recovery, with vacancies peaking anywhere from five to six quarters ago and being on a downward trend since then. Source: Reis, Inc. Effective Rent Growth & Vacancy Patterns for Warehouse/ Because of the nascent nature of the retail recovery, the biggest Distribution Facilities threat to future gains is a slowdown in the pace of economic growth. Consider, for example, what increasing oil prices might do. Figure 5 Typically, GDP growth is shaved by 20 basis points for every 10% Effective Rent Growth & Vacancy Patterns for Warehouse/Distribution Facilities increase in the price of oil. Consensus forecasts for oil prices in 2012 suggest that despite a rising trend, US economic recovery should proceed largely unencumbered. However, a significant supply shock to oil prices stemming from escalating tensions involving Iran will put a stop to global economic growth, and with that, dampen the prospects of retail recovery. The Picture is Mixed for Different Industrial Property Subtypes Net absorption for warehouse/distribution and flex/R&D properties came in relatively healthy in 2011. Flex/R&D buildings gained about 9 million square feet of occupied space, and warehouse/ distribution facilities posted an increase of about 6.4 million square feet. Flex/R&D ended the fourth quarter at 15.1 percent vacancies, Source: Reis, Inc. a full 30 basis points lower than third quarter figures. A publication of Summer issue 2012 sponsored by CRE Finance World Summer 2012 13


CRE Finance World, Summer 2012
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