Archives for November 2014

November 2014 Commercial Real Estate Outlook
Economic Overview: Commercial Demand Gets Boost from Economic Momentum in Q3
Amid worries of a global economic slackening, U.S. gross domestic product(GDP) increased at an annual rate of 3.6percent during the third quarter 2014. The pace of growth exceeded economists’ expectations, and it provided forward momentum to commercial real estate markets.
Gains in international trade along with positive government spending were the main engines of growth for third quarterGDP. After a double-digit annual rate ofgrowth in the second quarter, U.S. exportsrose at a 7.8 percent rate in the thirdquarter. Export sector growth was boostedby U.S. goods leaving for foreign shores ata pace which was 11.0 percent higher.Meanwhile, imports of goods and services declined at a 1.7 percent rate over the period, due mainly to a drop in imported goods.
Government spending which has acted asa drag on GDP growth over the past few years rose at a 4.6 percent annual rate during the third quarter. The increase came from federal spending, specifically national defense consumption, which advanced at a15.9 percent rate during the quarter.Government spending at the state and local levels was also positive 1.3 percent higher on an annual basis.
Consumer spending the largest GDP component also rose, but at a more modest 1.8 percent annual rate. Consumers spent more on both goods andservices, by 3.1 percent and 1.1 percent annual rate, respectively.
Consumers purchased more cars, furniture and household appliances, recreational vehicles, as well as clothing and shoes. The quarter also bode well for transportation providers, along with financial services and insurance companies, which experienced higher sales.
Business spending increased at a 5.5 percent annual rate, driven by spending on equipment upgrades. Spending on industrial equipment increased 24.9 percent,while investments in transportation equipment rose 30.2 percent in the third quarter. Commercial construction continued, with investments in commercial structures rising 3.7 percent. Business investments in intellectual property products software, R&D, entertainment,literary works increased at a 4.2 percent annual rate.
The economic picture was positive across most major indices. Manufacturers’ new orders rose at an annual rate of 15.9 percent in the third quarter, on the strength of transportation equipment orders, especially large orders of non-defense aircraft in July. Manufacturer’s shipments increased at a 4.8 percent annual rate during the quarter, taking pressure of inventories, which increased at 1.4 percent, the slowest advance of the year so far. The Institute for Supply Management’s Composite Index of manufacturing and non-manufacturing activity rose at a 23.3 percent annual rate, reaching a value of58.8 in the third quarter (values above 50 denote increasing activity).

The Gila River in the Mongolian Mountains. A project approved by the Interstate Stream Commission on Monday would divert water from the river for use in southwestern New Mexico farms and cities.
The New Mexico Interstate Stream Commission today approved a controversial proposal to notify the U.S. Department of the Interior that the state wants to divert water from the Gila River for use in southwestern New Mexico farms and cities.
The commission, on a unanimous vote, agreed to formally notify the U.S. Department of Interior that it wants to proceed with a project that would divert water from the Gila during times of high flow, building reservoir storage so that it can then be piped for as yet unidentified use.
But commissioners cautioned that this was only a first step, and expressed reservations about the state’s ability to fund the project.
Opponents say the cost – at least $575 million according to a state consultant, and possible $1 billion according to an independent federal review – is too high given the small amount of water the project will yield. Project supporters say arid New Mexico cannot afford to pass up the water. “Luna County’s statement is that water needs to come out of the river. It’s the 10th poorest county in the country, and we’re turning away businesses because we don’t have water,” county manager Charles “Tink” Jackson told the Journal last week.
The decision frees up $62 million in federal money for the project, though state officials acknowledged it could take decades before anything is built. The decision launches a major federal review, which will include analyses under the federal Endangered Species Act and the National Environmental Policy Act. No formal federal decision is likely until at least 2019, state staff told the commission.
In the meantime, New Mexico can continue studies in the project, to flesh out details of the project, including how much it will cost and how much water it will yield.
At Monday’s meeting, Interstate Stream Commission staff acknowledged that evaporation and reservoir seepage will eat up nearly half the water before it ever reaches any farms or cities. The law under which the project would be built authorized 14,000 acre feet per year on average from the Gila, but the actual yield will likely be between 6,000 and 8,000 acre feet, ISC staff member Ali Effati told the commission.
By: John Fleck (Albuquerque Journal)
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WASHINGTON – Despite a slowing global economy, forward economic momentum in the U.S. should keep commercial real estate activity on firmer footing, according to the National Association of Realtors^® quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, says commercial activity should progress at a gradual pace heading into 2015. “Solid economic growth in the third quarter proved that the second quarter wasn’t an anomaly, as business spending increased, commercial construction rose and the labor market continued to make positive strides,” he said. “Job growth is the catalyst to improved demand for commercial real estate leasing and new construction projects.”
However, Yun does caution that softening in the global economy will likely widen the trade deficit in the U.S. and could trigger some weakening in the overall economy. “GDP growth in the fourth quarter will be sluggish at around 2 percent behind stalling exports. Although GDP will likely climb to near 3 percent in 2015, the current pace of job growth could slow and ultimately impact commercial real estate activity if sluggishness in the global economy persists,” he said.
National office vacancy rates are forecast to decrease 0.5 percent over the coming year due to job growth exceeding inventory coming onto the market. Improved manufacturing activity should lead to a declining vacancy rate for industrial space (0.4 percent), while retail space is forecast to decline 0.2 percent behind a boost in consumer spending from personal income gains and lower gas prices.
“Low housing inventory and the sizeable demand for rentals will continue to spur multifamily construction as well as keep rents rising above inflation through next year,” says Yun.
NAR’s latest Commercial Real Estate Outlook¹ 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 commercial real estate performance information.
Office Markets
Office vacancy rates are forecast to slightly decline from 15.7 percent in the fourth quarter to 15.6 percent through the fourth quarter of 2015.
The markets with the lowest office vacancy rates in the fourth quarter are Washington, D.C., at 9.3 percent; New York City, 9.6 percent; Little Rock, Ark., 11.6 percent; San Francisco, 12.2 percent; and Seattle, at 12.8 percent.
Office rents are projected to increase 2.4 percent in 2014 and 3.3 percent next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 35.6 million square feet this year and 48.8 million in 2015.
Industrial Markets 
Industrial vacancy rates are expected to fall from 8.8 percent in the fourth quarter to 8.4 percent in the fourth quarter of 2015.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.6 percent; Los Angeles, 3.7 percent; Seattle, 5.8 percent; Miami, 6.0; and Palm Beach, Fla., at 6.5 percent.
Annual industrial rents should rise 2.4 percent this year and 2.9 percent in 2015. Net absorption of industrial space nationally is expected to total 110.7 million square feet in 2014 and 102.5 million square feet next year.
Retail Markets
Vacancy rates in the retail market are expected to decline from 9.7 percent currently to 9.5 percent in the fourth quarter of 2015.
Currently, the markets with the lowest retail vacancy rates include San Francisco, at 3.5 percent; Fairfield County, Conn., 3.9 percent; San Jose, Calif., 4.6 percent; Orange County, Calif., 5.2 percent; and Long Island, N.Y., at 5.3 percent.
Average retail rents are forecast to rise 2.0 percent in 2014 and 2.5 percent next year. Net absorption of retail space is likely to total 11.4 million square feet this year and jump to 18.9 million in 2015.
Multifamily Markets
The apartment rental market – multifamily housing – should see vacancy rates slightly increase from 4.0 percent currently to 4.3 percent in the fourth quarter of 2015. Vacancy rates below 5 percent are generally considered a landlord’s market, with demand justifying higher rent.
Areas with the lowest multifamily vacancy rates currently are Orange County, Calif., and Sacramento, Calif., at 2.2 percent; Providence, R.I., and New Haven, Conn., at 2.3 percent; and Hartford, Conn., at 2.5 percent.
Average apartment rents are projected to rise 4.0 this year and 3.9 percent in 2015. Multifamily net absorption is expected to total 216,300 units in 2014 and 171,200 next year.
The NAR commercial community includes commercial members; commercial real estate 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 commercial real estate services as a secondary business.
The National Association of Realtors^®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
By: Adam DeSanctis (National Association of REALTORS®)
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