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WASHINGTON, DC-The National Association of Realtors provides another proof point that the commercial real estate industry–in contrast to the residential sector–is still performing well. It reports that investment in commercial real estate rose 11% to a record $306.8 billion in investment-grade transactions in 2006, with office the top investment category. A record $71 billion worth of office properties traded hands in the first quarter, with strong activity in New York, Boston, Los Angeles and Chicago. Annual rent growth in the office sector is forecast at 3% to 3.5% in 2007.

Furthermore, decent employment growth, improving fundamentals, a favorable interest rate environment and limited speculative construction point to continued investment flows in this year as well.

This figures buttress findings released earlier this week by Stephen Fuller, director of the Center for Regional Analysis at George Mason University, for an analysis sponsored by the National Association of Industrial and Office Properties Research Foundation. It found that commercial real estate activity had the same impact on the economy as federal spending.

Downside factors, the NAR also pointed out, include construction costs that continue to rise, the specter of rising inflation, declining retail demand and a slowdown in the economy, a result in large part, says Lawrence Yun, NAR senior economist, of dragging residential construction.

“Because commercial sectors follow the economy, commercial markets are in a process of normalizing,” he says.

According to the NAR, the West and Midwest are the most active for industrial property investment, with overall sales volume running 10% higher than the same time last year. “The inventory-to-sales ratio in the retail sector is low, with a similar situation in wholesale inventory, so there is a need to restock–that means there also is a need for more space,” Yun says. “In addition, orders for durable goods have been rising.”

Investment volume rose 22% last year as retail portfolios changed hands. The situation has changed somewhat this year with retail experiencing significant vacancy rate increases and declining net rental sales. Also decelerating retail sales are lessening the demand for space.

Investor interest in multifamily transactions is waning, which are down 29% so far in 2007. Demographic trends are favoring warm-weather, low-tax states, such as Florida, Arizona, Nevada, Georgia and North Carolina.

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