by Brianna Crandall — March 5, 2014—Market fundamentals in commercial real estate (CRE) continue to improve but at a slower pace, according to the National Association of Realtors quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, said fundamentals are still on an uptrend. “Growth in commercial real estate sectors continues at a moderate pace from a very slow pace of absorption, despite job additions to the economy. Companies appear hesitant to add new space,” he said.
“Office demand is expected to see only slow and gradual improvement. Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space. Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners,” Yun said.
National vacancy rates in the coming year are forecast to decline 0.2 percentage point in the office market, which has the highest level of empty space, 0.1 point in industrial, and 0.3 point for retail real estate. With rising apartment construction, the average multifamily vacancy rate will edge up 0.1%, but this sector continues to experience the tightest availability and strongest rent growth of all the commercial sectors.
NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., a source of CRE performance information.
NAR’s projections for the current quarter and year ahead include:
Office Markets
Vacancy rates in the office sector should decline from an expected 15.8% in the first quarter (Q1) of this year to 15.6% in Q1 of 2015. The markets with the lowest office vacancy rates presently (in Q1) are New York City, with a vacancy rate of 9.5%; Washington, DC, at 10.2%; Little Rock, AR, 11.6%; Birmingham, AL, 12.7%; and San Francisco, CA, and Nashville, TN, at 12.8% each.
Office rents are projected to increase 2.3% in 2014 and 3.2% next year. Net absorption of office space in the United States, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 44.6 million square feet this year and 50.0 million in 2015.
Industrial Markets
Industrial vacancy rates are anticipated to fall from 9.0% in the first quarter of this year to 8.9% in Q1 of 2015. The areas with the lowest industrial vacancy rates currently are Orange County, CA, with a vacancy rate of 3.7%; Los Angeles, CA, at 3.8%; Miami, FL, 5.8%; Seattle, WA, 5.9%; and San Riverside/Bernardino, CA, at 6.1%.
Annual industrial rents should rise 2.4% this year and 2.6% in 2015. Net absorption of industrial space nationally is seen at 106.1 million square feet in 2014 and 110.6 million next year.
Retail Markets
Retail vacancy rates are expected to decline from 10.2% in the first quarter of this year to 9.9% in Q1 of 2015. Presently, markets with the lowest retail vacancy rates include San Francisco, CA, at 3.1%; Fairfield County, CT, 3.8%; Long Island, NY, 4.8%; San Jose, CA, 5.2%; and Northern New Jersey and Orange County, CA, at 5.3% each.
Average retail rents are forecast to rise 2.0% in 2014 and 2.3% next year. Net absorption of retail space is likely to total 14.6 million square feet this year and 20.9 million in 2015.
Multifamily Markets
The apartment rental market—multifamily housing—should see vacancy rates edge up from 4.0% in the first quarter to 4.1% in Q1 of 2015, with additional supply helping to meet growing demand. Generally, vacancy rates below 5% are considered a landlord’s market, with demand justifying higher rent.
Areas with the lowest multifamily vacancy rates currently are New Haven, CT, at 2.1%; Minneapolis, MN, and New York City, 2.3%; and Oakland-East Bay, CA, and San Diego, CA, at 2.5% each. Average apartment rents are projected to rise 4.3% this year and 3.5% in 2015. Multifamily net absorption is expected to total 204,900 units in 2014 and 112,500 next year.
The National Association of Realtors, “The Voice for Real Estate,” is said to be America’s largest trade association, representing one million members involved in all aspects of the residential and commercial real estate industries.
