2013 Local Economic Conditions: What’s up with Commercial Property?

This is the first post in a series this week discussing different perspectives regarding the results of NLC’s 2013 Local Economic Conditions Survey.

NLC’s 2013 Local Economic Conditions (LEC) Survey, which was released last week, showed overall improvement in local economic benchmarks over the last year. But it also demonstrated that certain indicators are lagging behind, such as the commercial property market. With over half of city officials reporting that commercial property vacancies and values are still a problem in their communities, it’s evident that the effects of the Great Recession still linger.

Improvement in Property Tax Indicators

The sharp uptick in city officials reporting improved commercial property values and vacancies from 2010 to 2011 can be explained fairly simply: the economy – real estate market included – was bouncing back from rock bottom after the combination of fiscal stimulus and monetary easing measures were introduced and implemented at the federal level.  These measures helped to accelerate purchases of distressed assets that could be moved at attractive price points.

The results of the LEC survey show that local officials saw a leveling off of the commercial property market in 2012. While many analysts predict that the market will continue to improve in 2013, they are mostly in agreement that the recovery will be slow.

Commercial Real Estate Prices

Vacancies vs. Values

Commercial property vacancies was the only measure that had less city officials reporting an improvement over the last year, while the perception of commercial property values continued to improve. Although it was a very small decline (4%), it is worth noting why there may be a disconnect between values and vacancies.

Many of the factors that are driving values are related to the ability to finance commercial real estate deals and trading activity. As prices approached pre-crisis levels earlier this year, Bloomberg reported a “’renaissance’ in the issuance of commercial mortgage backed securities…particularly for lower-quality properties, because financing will be more available.” And the CoStar Group reported that “both the investment grade and general commercial segments were heavily traded as improving market fundamentals and attractive yields relative to other asset classes drove strong investor interest in commercial real estate.”

Meanwhile, vacancies continue to persist. In the fourth quarter of 2012, Reuters reported that the office vacancy rate stood at 17.1 percent, “far higher than the 12.6 percent recorded at the end of 2007.” The article also highlights the fact that without a strong recovery in labor markets and employment, office vacancies will continue to stagnate. The National Association of Realtors notes 10.8 percent vacancy rate in retail markets in the fourth quarter of 2012 and a 10.1 percent vacancy rate in industrial markets. NAR expects marginal improvement in these metrics over the course of 2013.

Looking Ahead

Based on the results of the LEC survey, the commercial property market should continue its slow recovery through 2013, though this is far from certain. According to local officials, unemployment (52%), business permits (49%), and retail (48%) are all improving in their communities, which should breathe new life into the market.

A robust recovery in commercial property is crucial, as cities depend on a healthy property market and business environment to provide tax revenues for essential services. 

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