by Brianna Crandall — February 1, 2016—The U.S. commercial real estate market shows continued healthy demand across all property types during the fourth quarter of 2015 (Q4 2015), according to the latest analysis from global property advisor CBRE Group.
In Q4 2015:
- The office vacancy rate declined 20 basis points (bps) to13.2%. The vacancy rate has not shown an increase in 23 quarters.
- The industrial availability rate continued to decline, falling by 20 bps to 9.4%. Industrial availability has also not risen for 23 consecutive quarters.
- The retail availability rate declined 10 bps to 11.2%, 210 bps below its post-recession peak of 13.3%.
- Demand for the nation’s apartments remained strong in Q4 2015 with vacancy at 4.6%.
Jeffrey Havsy, Americas chief economist for CBRE, commented:
U.S. commercial real estate had another solid quarter with vacancy rates declining for the office, industrial and retail sectors due to steady absorption and relatively limited supply. Commercial real estate remains in a ‘goldilocks’ state with both demand and supply neither too hot nor too cold. This slow, stable improvement is extremely healthy for the sector, but is at a pace that is sustainable for 2016.”
CBRE defines “availability” as space that is actively being marketed and available for tenant build-out within 12 months. CBRE’s analysis of the fourth quarter vacancy rates, including some of the effect on rent rates, appears below.
The Q4 2015 office vacancy rate of 13.2% is an 80-bps drop from a year ago. There has been no increase in the national office vacancy rate since the end of the Great Recession — 23 consecutive quarters. Vacancy rates continued to decline in both suburban and downtown markets in Q4, with the suburban rate falling by 30 bps to 14.7% while downtown dropped 10 bps to 10.3% — the lowest rate since 2008.
San Jose recorded one of the largest quarterly declines (170 bps), while Chicago, Raleigh and Phoenix declined by 80 bps or more. Overall, markets in California and the South saw the greatest improvement in 2015. Besides San Jose and Raleigh, these include Oakland, Jacksonville, Miami, Atlanta, Sacramento, Orlando and Tampa.
The nation’s lowest vacancy rates in Q4 2015 were recorded in San Francisco (6.3%), Nashville (7.5), Austin (7.6%), Albany (8.1%) and San Jose (8.2%).
Economic fundamentals remain strong and point to continued U.S. office expansion in 2016, supported by a strong domestic job market. The Federal Reserve’s decision to raise interest rates most likely will not affect capital flows into the commercial real estate sector. Recent changes in the Foreign Investment in Real Property Tax Act and the extension of the EB-5 program should help to increase the flow of foreign capital into U.S. commercial real estate, while strong economic fundamentals will maintain asset valuations despite rising interest rates.
The Q4 2015 industrial availability rate of 9.4% underscores the full recovery in the sector that began earlier in the year and continued the move into expansionary territory for this cycle. 23 consecutive quarters of falling availability is the longest stretch since CBRE began tracking the national market in 1989.
Thirty-five markets out of 57 industrial markets reported declining availability in Q4. Detroit led the declines with a 120 bps drop. Significant availability declines were also recorded in Dallas and New York (each of which fell 70 bps) and Atlanta (which declined 50 bps).
Havsy pointed out:
The majority of markets continue to improve and few are even experiencing lower levels of available space than has been seen in decades. Such constraints will continue to provide upward pressure on rent levels, as demand-side fundamentals remain quite favorable for industrial users.
The Q4 2015 retail availability rate of 11.2% was 20 bps below its year ago rate. Half of the 62 markets tracked saw availability declines in Q4. Denver, Cleveland, San Francisco, Portland and Memphis were among the markets recording availability rate declines of at least 50 bps in the fourth quarter.
Austin, Salt Lake City and Atlanta were among those recording the greatest declines compared to one year ago.
With lower gas prices, easier access to credit and a rapidly improving labor market, consumer spending should continue to grow and the continuing decline in availability should translate into retail rent growth in the coming quarters.
Preliminary data for Q4 2015 shows that the nation’s apartment vacancy rate dropped 10 bps from a year earlier, to 4.6%. Compared to a year earlier vacancy rates declined in 36 of 62 markets while rising in 24 and staying the same in two. Cincinnati (-130 bps), Detroit (-100 bps) and Long Island and Providence (-90 bps each) had the greatest declines in vacancy.
The tightest markets include those in the Greater New York area, Los Angeles, Fort Lauderdale, San Francisco, Salt Lake City and Nashville. The market is very tight and apartment demand remains strong as the vacancy rate pushes closer to its 20-year vacancy low of 4.0%.
Over a longer time horizon, however, additional construction and renewed competition from the single-family housing market will temper rent growth.
Further analysis is available from the CBRE Research Center.