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Rents Are Rising, Sort Of: Another Sign Of Slow Recovery

We've been hearing about the excess capacity in the economy, but two statistics out this week tell us that some of the extra may be disappearing on the real estate front -- an improving outlook for rents, both for offices and apartments. For offices it's not unqualified good news; to be honest, it's still decreases in rents and rising vacancies, albeit at slower rates, more of the "less bad" sort of thing we've seen for a while. Apartments seem to have genuinely turned the corner, but the real estate experts still are cautioning the industry to expect a slow recovery.

New York-based Reis, Inc. is a firm that compiles and analyzes data on all sorts of commercial real estate (which includes apartment buildings), and this week they've released their latest reports on trends in occupancy and rents in all sorts of markets.

On apartments, it sounds like things have bottomed out and shown a genuine improvement. Sorry, no links:

In a surprising show of resilience, apartment vacancies stayed flat in the first quarter, bucking the seasonal weakness [t]raditionally shown during the colder months...
Apartment vacancy rates are still at historic highs, about eight percent. But Reis says the market absorbed about 20,000 apartment units during the first quarter, the largest gain for that period in 10 years.

Rents fell by three percent during 2009, but tightened in 1Q 2010, although just by trace amounts (plus 0.3 percent for "effective" rents -- as opposed to asking prices).

For apartments, Reis forecasts:

We remain of the belief that this is going to be a slow recovery. Although first quarter results were uncommonly robust, it does not mean every single measure of performance was positive. Newly completed properties came online more than half-empty... Vacancy levels rose in 30 out of 79 markets, even if national vacancies remained flat. Still, this quarter's results taken as a whole are consistent with our expectation that the apartment sector will be the first to recover as the overall economy emerges from the recession.
One quarter's results should not be extrapolated into a trend, but since the following quarters usually represent stronger leasing periods for rentals, it appears that several apartment markets may have bottomed and may be on track to recovery.
That makes sense in light of a slow recovery in employment. But in particular, Reis points to strength in the Miami, Ventura County, Tucson, Memphis and Houston apartment markets, where effective rents rose by more than one percent in each.

The "less bad" news for commercial real estate is that while vacancies are at 16-year records -- dating back to 1994, when vacancies were the consequence of overlending and overbuilding in the late 1980s and early 1990s.

Senior analyst Kyle McLaughlin at Reis surmises:

Even as occupancy continues to deteriorate, we're observing signs of renewed leasing activity across different metros. Although asking and effective rents continued to decline (both fell at the same rate of -0.8% in the first quarter), these figures represent a marked slowdown relative to the quarterly declines recorded in 2009. As labor markets stabilize we expect occupancies and rents to require another 12 to 18 months before showing signs of improvement, given typical lags in commercial real estate.
Not good news for the banks lending on commercial properties, but at least there isn't much new building:
[C]ompletions slowed to a trickle, with only 3.6 million square feet of office space coming online. This is the lowest level of completions on record since Reis began publishing quarterly data in 1999.