What might brokers expect to see throughout the industry this year?

Sanford S. Herrick, managing director, Hudson Realty Capital LLC

As published in Scotsman Guide's Commercial Edition, January 2007.

To many, 2006 was a "cusp year" -- one that signaled a turning point for the real estate industry. The story will be more fully told in 2007. Let's take a look at some market trends that commercial brokers should watch this year.

Housing

Much has already been made of the real estate bubble. While the bubble has not necessarily burst, home purchases did start to decline in 2006. The velocity and sales price of new and existing homes have deflated, including for condos, detached homes, townhouses and residential developments.

While this reality is perhaps more true in some markets -- such as Phoenix; Washington, D.C.; and Miami -- than in others, consumers across the board in 2007 are no longer likely to perceive their home as a stock-market surrogate. This may slow down land sales for housing development.

On the other hand, the rental-housing market has started to bounce back. The abundance of cheap money had previously taken its toll on the rental marketplace throughout the housing boom. But the apartment sector started to gain momentum in 2006 and seems likely to continue to strengthen this year. Rental concessions such as $99 move-in specials and a free month's rent have been replaced by healthier rental rates and higher occupancies at apartment communities nationwide.

Regardless of whether the Federal Reserve raises interest rates, more people seem poised to remain in their rental units, shying from buying a home. Nationally, vacancy rates will continue to drop from a high of 11.5 percent in 2004, according to National Multi Housing Council figures, to new lows in many major markets.

Conversions

The office market has been impacted by a healthier economy in the past two years. For example, monthly national employment gains were fairly steady throughout 2006, with generally more than 100,000 new jobs added per month.

Interestingly, like the multifamily market, which experienced a near frenzy of condo conversions in recent years, the commercial-office market also has been impacted by conversions of one kind or another. For example, old office space has been converted to multifamily rental properties or residential condos in various markets.

The availability of leased commercial space is being impacted by yet another conversion trend -- office-condos. The Phoenix office market is a leader in this trend.

Conversions have limited the amount of commercial office space for lease, and they could favorably impact the commercial marketplace this year, fueling demand that will outpace supply in many markets.

Investments

Many companies will look to divest some of their real estate assets to bolster their balance sheets. For example, national retail chains and other large corporations typically do not like to have real estate on their balance sheets because it negatively impacts their earnings picture. This is especially true in rising-interest-rate environments.

In addition, major retailers such as big-box home-improvement and home-furnishing stores that rely on housing as their primary source for business are likely to feel an economic pinch in 2007 and beyond. As a result, we are likely to see store closings in pockets nationwide where multiple locations are more than what is needed to service the market.

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