Commercial Real Estate Rents on the Rise

By Glenn Somerville

Shopping centers and office towers that sat empty and unlighted during and after the recession are slowly being put back into use. Along with the rest of the national economy, rents for commercial space hit the skids during the severe 2007-2009 contraction. Now a slow but steady revival means rents will rise about 2.25% on average in 2014, after climbing about 2% this year. Nearly three years of unbroken monthly job creation has left shoppers better off and businesses looking around for warehouse space that will allow them to stock up inventories.

Boom conditions they’re not — certainly the improvement isn’t enough to trigger another construction surge. But the situation is a great deal better than from 2009 to mid-2011, when industry discussion focused on how much rents had to be cut to keep any occupants in commercial buildings. The upswing is not evenly distributed, either, especially for retail space. Consumer demand has not rebounded equally and some big urban areas — Los Angeles on the West Coast and New York on the East Coast, for example — are seeing big rent increases. Meanwhile, commercial real estate in other regions continues to languish.

Still, “a rising tide lifts all boats,” as Phil Jemmett, a commercial loan expert and CEO of Breakwater Equity Partners in San Diego, says. “The further the Great Recession retreats into our past, the more accurately we can see that the recovering economy is lifting the commercial real estate industry. The end of 2012 marked an inflection point and we have subsequently seen steady improvement.”

After increasing an average of 2.6% this year, top-flight office space will cost about 2.8% more next year — more on the coasts, where businesses cluster and legal, banking and other business service industries bid for the classiest buildings and premium locations.

Not long ago, a savvy businessman could snag the best space, Class A, for a song, just because its owners desperately needed the income. Those days are gone. Such top-quality space in primary markets such as New York and Los Angeles has now reached its potential, according to Jemmett. He says, “Deals that were available 18 months ago are absolutely, categorically out the window now.” Even in popular smaller markets —such as Austin, Texas — rents are following that upward trend.

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