Modest Growth Expected in Commercial Real Estate Markets

WASHINGTON — A stronger labor market and increasing household formation should keep commercial real estate demand on a gradual incline, according to the National Association of Realtors® quarterly commercial real estate forecast.
National office vacancy rates are forecast to slightly decrease 0.1 percent over the coming year as the demand for office space slowly improves. The vacancy rate for industrial space is expected to decline 0.3 percent and retail space 0.4 percent as manufacturing output increases and low gas prices and slight income gains boost consumer spending. An influx in new apartment construction is forecast to cause an uptick (0.1 percent) in the multifamily vacancy rate.
Lawrence Yun, NAR chief economist, says commercial rents have risen at a moderate pace across the board for several quarters now and vacancy rates have been on a gradual decline. “The commercial real estate sector is on the path to recovery, but subpar economic growth, lack of financing available to small investors and the industry trend towards squeezing more employees into existing spaces will keep demand from meaningful acceleration,” he said. “The exception is multifamily housing, which remains the best performer with vacancy rates under 4 percent in several markets in the Northeast and in California.”
According to Yun, job growth and increasing household formation among young adults is supporting continued, robust demand for apartments. However, vacancies are expected to slightly rise over the next year as a higher-than-anticipated climb in multifamily completions is coming onto the market to meet that demand.
Looking ahead, Yun expects the economy to slowly pick up in upcoming quarters after severe winter weather, a widening trade gap and port disputes on the West Coast dragged on gross domestic product growth in the first quarter. “Similar to last year, economic growth will likely rebound as the year progresses, although perhaps not as robustly as what was seen in 2014. However, as long as jobs are being added at a respectable pace, gradual increases in demand for commercial spaces and leasing projects should continue.”
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.
According to NAR’s recent 2015 Commercial Lending Trends Survey, Realtor® commercial members in the past year managed transactions averaging $1.6 million per deal — frequently located in secondary and tertiary markets — and focused on small businesses and entrepreneurs.
Office Markets
Office vacancy rates are forecast to slightly decline from 15.6 percent in the second quarter to 15.5 percent in the second quarter of 2016.
The markets with the lowest office vacancy rates in the second quarter are New York City, at 8.9 percent; Washington, D.C., at 9.0 percent; San Francisco, at 10.6 percent; and Little Rock, Ark., and Portland, Ore. at 11.6 percent.
Office rents are projected to increase 3.4 percent this year and 3.7 percent in 2016. 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 51.8 million square feet this year and 60.0 million in 2016.
Industrial Markets
Industrial vacancy rates are expected to fall from 8.4 percent in the second quarter to 8.1 percent in the second quarter of 2016.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.4 percent; Los Angeles, 3.6 percent; Miami, at 5.3 percent; Seattle, at 5.4 percent; and Palm Beach, Fla., at 5.5 percent.
Annual industrial rents should rise at a clip of 3.1 percent both this year and in 2016. Net absorption of industrial space nationally is expected to total 108.8 million square feet in 2015 and 104.9 million square feet next year.
Retail Markets
Vacancy rates in the retail market are expected to decline from 9.6 percent currently to 9.2 percent in the second quarter of 2016.
Currently, the markets with the lowest retail vacancy rates include San Francisco, at 3.0 percent; Orange County, Calif., and San Jose, Calif., at 4.6 percent; Fairfield County, Conn., at 4.7 percent; and Long Island, N.Y., 4.9 percent.
Average retail rents are forecast to rise 2.6 percent this year and 3.1 percent in 2016. Net absorption of retail space is likely to total 15.8 million square feet this year and jump to 21.1 million in 2016.
Multifamily Markets
The apartment rental market should see vacancy rates slightly increase from 4.3 percent currently to 4.4 percent in the second quarter of 2016. 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 San Bernardino-Riverside, Calif., at 2.5 percent; Sacramento, Calif., 2.6 percent; New Haven, Conn., and Providence, R.I. at 2.7 percent; and Cleveland, Ohio, Oakland-East Bay, Calif., and San Diego at 2.8 percent.
With an influx of new supply coming onto the market, average apartment rents are projected to increase 3.6 percent this year and at a slower pace of 3.3 percent in 2016. Multifamily net absorption is expected to total 172,524 units in 2015 and 153,747 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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