by Brianna Crandall — August 29, 2014—The strong rebound in economic growth during the second quarter and ongoing job creation are gradually improving the outlook for all of the major commercial real estate sectors, according to the National Association of Realtors’ quarterly commercial real estate forecast. Lawrence Yun, NAR chief economist, says after many false starts, the economy finally appears to be turning a corner to firmer ground.
“The job market has been the bright spot of the economy this year as employers are feeling more confident about their growth prospects and adding to their payrolls,” says Yun. “This gradual turnaround from being overly cautious to more optimistic should slightly boost the demand for leasing and purchase activity as well as new construction projects in the upcoming year. The economy can handle the inevitable rise in interest rates as long as commercial rents steadily rise to generate investor returns.”
National office vacancy rates are forecast to remain unchanged over the coming year, mostly due to added inventory entering the market. Rising exports and a shrinking trade deficit should lead to a declining vacancy rate for industrial space (0.4%), while retail space is forecast to decline 0.2% behind favorable gains in personal income and consumer spending.
NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors, analyzing quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas was provided by REIS Inc., a source of commercial real estate performance information.
Office markets
- Office vacancy rates are forecast to remain unchanged at 15.7% through the third quarter (Q3) of 2015. Currently, the markets with the lowest rates in the third quarter are Washington, DC, at 9.3%; New York City, 9.6%; Little Rock, AR, 11.5%; San Francisco, 12.4%; and New Orleans, at 12.7%.
- Office rents are projected to increase 2.6% in 2014 and 3.2% next year. Net absorption of office space in the USA, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 36.2 million square feet this year and 50.7 million in 2015.
Industrial markets
- Industrial vacancy rates are expected to fall from 8.9% in the third quarter to 8.5% in Q3 2015. The areas with the lowest rates currently are Orange County, CA, with a vacancy rate of 3.5%; Los Angeles, 3.8%; Seattle, 5.9%; Miami, 6.1%; and Palm Beach, FL, at 6.6%.
- Annual industrial rents should rise 2.4% this year and 2.8% in 2015. Net absorption of industrial space nationally is seen at 107.6 million square feet in 2014 and 104.9 million next year.
Retail markets
- Vacancy rates in the retail market are expected to decline from 9.8% currently to 9.6% in Q3 2015. Currently, the markets with the lowest rates include San Francisco, at 3.5%; Fairfield County, CT, 3.9%; San Jose, CA, 4.6%; Long Island, NY, 5.2%; and Orange County, CA, at 5.3%.
- Average retail rents are forecast to rise 2.0% in 2014 and 2.4% next year. Net absorption of retail space is likely to total 11.2 million square feet this year and 19.3 million in 2015.
Multifamily markets
- The apartment rental market — multifamily housing — should see vacancy rates slightly decline from 4.1% currently to 4.0% in Q3 2015. Vacancy rates below 5% are generally considered a landlord’s market, with demand justifying higher rent. Areas with the lowest rates currently are Orange County, CA, Providence, RI, and Sacramento, CA, at 2.2%; and two Connecticut cities (New Haven and Hartford) at 2.5%.
- Average apartment rents are projected to rise 4.0 this year and in 2015. Multifamily net absorption is expected to total 223,400 units in 2014 and 171,000 next year.
The Commercial Real Estate Outlook is published by the NAR Research Division. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
