There are many ways to forecast how commercial real estate may look in the near term.  One of the most important ways to anticipate trends is to look at how experts in the field forecast the  “absorption rate” over the near term. The absorption rate tells you how quickly rentable spaces should lease up.  There are two ways to think about commercial real estate absorption rates: gross and net. Gross absorption measures the total square footage within a particular geographic area which is leased during a specific period of time without taking into account how much space is vacated during that same time period. Net absorption, however, is calculated by subtracting the occupied square footage at the beginning of the specified time period from the occupied square footage at the end of the time period. In doing so, it takes the vacated space into consideration by balancing gains against losses and provides a more accurate picture of the market itself.  This is the method most analysts prefer.

Forecasting this type of net absorption requires expert opinions.  At the recent Cassidy Turley 2013 real estate forecast event their experts predicted that in metro Denver the net absorption is predicted to increase in all four main sectors significantly in 2013 and 2014. Cassidy Turley predicts that metro area office absorption should increase from 48.2 msf (millions of square feet) in 2012 to 60.3 msf in 2014; industrial absorption should increase from 105 msf in 2012 to 108.1 msf in 2014; retail absorption should increase from 9.5 msf in 2012 to 16 msf in 2014; and multi family will increase from 140.1 thousand of square feet in 2012 to 159.8 thousand of square feet in 2014. While retail and office rates are still below pre-recession averages, industrial and apartment sectors are anticipated to exceed past levels.

The top nine U.S. cities in the office sector have net absorption rates ranging from 4 to 16 msf. Denver is sixth on the list, following New York, San Jose-Silicon Valley, Houston, Seattle and San Francisco. While Denver experienced a dip in office sector net absorption in 2011 and 2012 following a dynamic recovery in 2010, the projected rate for 2013 (based on first quarter numbers) meets the numbers from 2010 and indicates an upward trend in the metro area. Denver’s office market has currently experienced thirteen consecutive quarters of positive absorption with 6.4 million rentable square feet in total and 375,000 rentable square feet so far this year. On the other hand, the industrial sector absorption rates have shown more erratic growth, and the 2013 projection is lower than in 2012, but remains higher than in 2011. However, forecasts for 2014 predict a record year of absorption in 2014 for the industrial market.

The increase of absorption rates in these sectors is an important indicator of how Denver’s commercial real estate market’s recovery is progressing. The general upward trends being predicted, both nationwide and in the Denver metro area, point to a return of a landlord’s market which means that there will be an increased demand for the supply of rentable square feet and that landlords should see a rise in income while tenants can anticipate receive fewer concessions.

This blog was written by Bob Amter, President of Montegra Capital Resources, LTD., a Colorado hard money lender.  [google_authorship] has been in the private capital lending business for 41 consecutive years.

Source:

Cassidy Turley 2013 Commercial Real Estate Forecast