Hints of a Rebirth for Commercial Real Estate?

Bargain hunters are starting to sniff around commercial real estate markets, though retail real estate remains under a heavy cloud.

Apartment and office buildings in Washington, D.C., New York City, San Francisco and Boston are sparking a bit of interest -- a signal that the bottom is nearing.

“While we may not have bottomed completely, investors are looking at fundamentals and future prospects,” says Alan Pontius, managing director at Marcus and Millichap Real Estate Investor Services. “Investors are no longer trying to time the market.”

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Average prices for commercial real estate are likely to keep slipping, though, dragged down by declines of up to 20% in Atlanta, Las Vegas, Phoenix and other areas with a hefty surplus of space. Brighter spots, where prices will flatten out this year, include Los Angeles, Austin, Texas, Washington, D.C., Portland, Ore. and North Carolina’s Raleigh-Durham area.

“The good news is that the freefall we saw in 2009 is over,” says Robert Bach, senior vice president at Grubb & Ellis, a commercial real estate advisory firm.

On the retail front, store closures this year will again be more numerous than usual, though fewer than in either 2008 or 2009.

Rents will soften further, sliding by about 4% after space improvements and other concessions are taken into account. Odds are it’ll take about five years for rents to regain their 2008 highs, even though minimal space will be added -- only 12 million square feet in strip malls this year, for example. That’s 20% more than last year but less than half the typical annual increase over the past decade for the “necessity based” outlets.

Retailers that have the capital are being extremely picky about new space, taking over vacant locations only in prime spots. Big chains are using their funds to redevelop existing stores -- making them better draws, rather than adding space.

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Idaszak, now retired, worked on The Kiplinger Letter as its economics writer for 21 years. Before joining Kiplinger in 1992, he worked for 15 years with the Chicago Sun-Times, including five years as a columnist and economic correspondent in the Washington, D.C., bureau, covering five international economic summit meetings. He holds bachelor's and master's degrees in journalism from Northwestern University.