As the U.S. economy continues to show signs of improvement and corporate America is slowly starting to increase headcount, a ray of light may shine on the commercial real estate sector supporting the iShares Dow Jones U.S. Real Estate (IYR), SPDR Dow Jones REIT (RWR), the Vanguard REIT Index ETF (VNQ) and the iShares Cohen & Steers Realty Majors (ICF).
The first indicator that the sector is improving can be seen in the drop in U.S. office vacancies, coupled with an increase in rents, in the most recent quarter. This trend has not been seen in nearly three years. More specifically, according to the property research firm, Reis Inc., the national vacancy rate fell to 17.5 percent in the first quarter of the year from 17.6 percent in the prior quarter, reports Bloomberg News. Furthermore, office buildings gained a net 4.7 million square feet of occupied space during the quarter, while rents increased by $0.11 per square foot to $22.20 during the same time period.
This improving trend has been driven by a steadily improving job market, which has further led to increased consumer and business confidence. As long as the labor markets continue to improve and corporate America increases headcount, the commercial real estate sector is likely to reap the benefits.
Another factor that continues to support commercial real estate is the stabilization and improvement of the credit markets. This has enabled refinancing of both short-term and long-term debt and access to capital which has further lead to increases in acquisitions of distressed properties.
In a nutshell, an opportunity appears to be forming in the commercial real estate sector, but it is important to take this with a slight grain of salt and be mindful of the risks and macroeconomic dependencies that the sector entails.
Disclosure: No Positions