by Brianna Crandall — February 25, 2015—A stronger labor market and stable U.S. economy should keep commercial real estate (CRE) demand on the rise, but the pace of growth will likely be hindered by overseas weakness, according to the National Association of Realtors quarterly commercial real estate forecast.
National office vacancy rates are forecast to slightly decrease 0.1% over the coming year as improved hiring increases the demand for office space. The vacancy rate for industrial space is expected to decline 0.4% and retail space 0.3% as manufacturers boost production for goods and services and consumers slightly accelerate their spending. A swath of new apartment construction coming onto the market is forecast to lead to an uptick (0.1%) in the multifamily vacancy rate.
Lawrence Yun, NAR chief economist, expects commercial real estate activity to hold steady heading into the spring. “The demand for leases and new construction projects is expected to slowly climb as businesses add to their payrolls and consumers reap the benefits of cheaper gas and any accompanying wage growth from a tighter labor market,” he said. “Furthermore, multifamily housing continues to be the top-performing sector with current rental demand exceeding supply — leading to rent growth that is easily outpacing inflation in many metro areas throughout the country.”
Although economic conditions are improving at home, Yun says weaknesses in the global economy will likely impact exports. “Sluggishness overseas alongside a strengthening U.S. dollar will widen the trade deficit and slow economic growth potential,” he said. “However, GDP is forecasted to come in around 3% in 2015 — the highest since the recession. Improvements in housing and commercial real estate market activity will measurably help economic growth.”
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 is provided by REIS Inc., a source of CRE performance information. Additional analyses will be posted under Economists’ Outlook in the Research blog section of Realtor.org in coming days.
In partnership with Deloitte and RERC Situs, NAR released an annual joint report earlier this month, Expectations & Market Realities in Real Estate 2015: Scaling New Heights, which forecasts for an expected increase in CRE value and pricing in 2015.
Office markets
Office vacancy rates are forecast to slightly decline from 15.8% in the first quarter to 15.7% in the first quarter of 2016.
The markets with the lowest office vacancy rates in the first quarter are Washington, DC, at 8.7%; New York City, 9.0%; Little Rock, AR, and Seattle, WA, at 11.5%; and San Francisco, CA, at 12.0%.
Office rents are projected to increase 3.3% in 2015 and 3.6% next year. Net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 47.7 million square feet this year and 58.3 million in 2016.
Industrial markets
Industrial vacancy rates are expected to fall from 8.7% in the first quarter to 8.3% in the first quarter of 2016.
The areas with the lowest industrial vacancy rates currently are Orange County, CA, with a vacancy rate of 3.4%; Los Angeles, CA, 3.7%; Miami and Palm Beach, FL, both at 5.4%; and Seattle, WA, at 5.6%.
Annual industrial rents should rise 3.0% this year and 3.1% in 2016. Net absorption of industrial space nationally is expected to total 102.2 million square feet in 2015 and 104.8 million square feet next year.
Retail markets
Vacancy rates in the retail market are expected to decline from 9.7% currently to 9.5% in the first quarter of 2016.
Currently, the markets with the lowest retail vacancy rates include San Francisco, CA, at 3.0%; Fairfield County, CT, and San Jose, CA, at 4.5%; Long Island, NY, 4.9%; and Orange County, CA, at 5.0%.
Average retail rents are forecast to rise 2.5% in 2015 and 3.1% next year. Net absorption of retail space is likely to total 15.7 million square feet this year and jump to 20.6 million in 2016.
Multifamily markets
The apartment rental market should see vacancy rates slightly increase from 4.1% currently to 4.3% in the first quarter of 2016. Vacancy rates below 5% are generally considered a landlord’s market, with demand justifying higher rent, notes NAR.
Areas with the lowest multifamily vacancy rates currently are Sacramento, CA, 2.5%; Orange County, CA, 2.6%; Hartford, CT, and Oakland-East Bay, CA, at 2.7%; and Rochester, NY, at 2.8%.
Average apartment rents are projected to rise 3.7% this year and 3.6% in 2016. Multifamily net absorption is expected to total 171,978 units in 2015 and 157,168 next year.
The National Association of Realtors is said to be America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries. The NAR commercial community includes commercial members; CRE boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations — CCIM Institute, Institute of Real Estate Management, Realtors Land Institute, Society of Industrial and Office Realtors, and Counselors of Real Estate. Approximately 70,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 283,000 members offer CRE services as a secondary business.
