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Commercial real estate market seen improving through 2006

WASHINGTON (Dow Jones/AP) -- The U.S. commercial real estate market should experience "solid" gains through 2006, the National Association of Realtors said Tuesday.

"Even with a lot of new construction around the country, we are seeing healthy levels of commercial real estate space being purchased, rented and occupied," David Lereah, NAR's chief economist, said in the group's latest forecast for the commercial real estate market.

"As a result, vacancies are declining across the board -- this is improving the fundamentals for commercial real estate sectors into the foreseeable future," he said.

The group's latest forecast comes as U.S. bank regulators are paying more attention to rising commercial real estate concentrations at some banks. Federal Reserve Governor Susan Bies earlier Tuesday said Fed staff members are considering issuing "supervisory guidance" on risk-management practices for commercial real estate exposures.

"During previous downturns in the credit cycle, banks with high commercial real estate concentrations suffered significant losses," Bies said in a speech Tuesday.

In its latest forecast that analyzes data in 57 metro areas, NAR said the commercial real estate market is improving as vacancy rates decline and rents firm up in all four commercial market sectors: office, retail, industrial and multifamily housing.

In the office sector, growing employment has spurred more demand for space, NAR said. Office vacancy rates should decline to 14.1 percent by the fourth quarter and 12.2 percent by the end of next year, down from 15.4 percent last year, NAR said. Office rents are forecast to grow 4.4 percent this year and 4.9 percent next year after rising just 0.4 percent last year, the group said.

The top metro markets for investment in the office sector are New York, Los Angeles, Washington, San Francisco and Chicago, NAR said.

In the industrial sector, vacancy rates are also seen falling to 9.9 percent by the end of this year, and 8.8 percent by the end of next year, compared with 10.9 percent last year. Industrial rents, which slipped 0.6 percent last year, are also seen climbing. They are projected to rise 1.7 percent this year and 2.5 percent in 2006.

The vacancy rate for retail properties is seen falling to 6.8 percent in the fourth quarter of this year, down from 7.5 percent last year. Rent growth is forecast at 3.2 percent both this year and next year, down from 3.3 percent in 2004.

Vacancies in rental apartments rates are seen falling to 5.7 percent by the end of this year and 5.2 percent in the fourth quarter next year, down from 6.2 percent last year. Average rent is seen up 2.5 percent this year and 2.7 percent in 2006, up from a 1.5 percent increase in 2004, NAR said.

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