According to the National Association of Realtors (NAR), the outlook on all major commercial real estate sectors are seeing slight improvements, but state that the economic growth in the first quarter of 2014 was “disappointing.”
This sentiment is echoed in Transwestern’s Insights + Trends + Opportunity report which notes that the economy and job growth continue on a slow and steady pace, though the overall picture is disappointing compared to previous recovery cycles; however, steady tapering should remove some of the all-too-familiar uncertainty that has plagued business decision-making and capital investment
Dr. Lawrence Yun, NAR chief economist, said the sluggish growth experienced in the first quarter is not indicative of the actual health of the economy. “Gross Domestic Product should expand closer to 3 percent for the remainder of the year. The improved lending for commercial loans and continuing job gains we’ve seen this spring bode well for modest progress in commercial real estate leases and purchases of properties.”
Dr. Yun cautions that with rising long-term interest rates on the horizon, consistent economic growth is imperative to solid commercial real estate investment in the years ahead.
Looking into the future
NAR reports that vacancy rates in the office market are forecast to decline 0.2 percentage points over the coming year, while international trade gains continue to boost use for industrial space, which forecasts a decline of 0.3 point.
The outlook for personal income and consumer spending is favorable for the retail market, likely leading to a vacancy decline of 0.2 percent.
“The multi-family sector continues to be the top-performer in commercial real estate with the lowest vacancy rates. However, tight availability – despite new construction – is causing rents to currently rise near 4 percent annually in many markets,” said Dr. Yun. “Many renters who are getting squeezed may begin to view homeownership as a more favorable, long-term option.”
Multifamily market performance in Q1
According to NAR, Multifamily should see vacancy rates edge up from 4.0 percent in the second quarter to 4.1 percent in the second quarter of 2015, with added supply helping to meet growing demand. 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 New Haven, Conn., at 2.3 percent; Ventura County, Calif., 2.4 percent; and New York City; San Diego; Hartford, Conn.; Oakland-East Bay, Calif., and San Diego, at 2.5 percent each.
Average apartment rents are projected to rise 4.0 this year and in 2015. Multifamily net absorption is expected to total 221,400 units in 2014 and 173,100 next year.
How did the office market fare?
Office vacancy rates should decline from an expected 15.8 percent in the second quarter of this year to 15.6 percent in the second quarter of 2015.
Currently, the markets with the lowest office vacancy rates in the second quarter are New York City and Washington, D.C. at 9.4 percent; Little Rock, Ark., 11.5 percent; San Francisco, 12.6 percent; and New Orleans, at 12.8 percent.
Office rents are projected to increase 2.5 percent in 2014 and 3.2 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 39.7 million square feet this year and 49.8 million in 2015.
Vacancies expected to decline in the retail sector
Vacancy rates in the retail market are expected to decline from 10.0 percent currently to 9.8 percent in the second quarter of 2015.
Presently, markets with the lowest retail vacancy rates include San Francisco, at 3.2 percent; Fairfield County, Conn., 3.8 percent; and San Jose, Calif., at 4.7 percent. Northern New Jersey; Long Island, N.Y.; and Orange County, Calif., all have a vacancy rate of 5.3 percent.
Average retail rents are forecast to rise 2.0 percent in 2014 and 2.3 percent next year. Net absorption of retail space is likely to total 11.5 million square feet this year and 19.6 million in 2015.
Industrial market is looking good
Industrial vacancy rates are anticipated to fall from 9.0 percent in the second quarter to 8.7 percent in the second quarter of 2015.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.5 percent; Los Angeles, 3.9 percent; Miami and Seattle, 6.0 percent, and Palm Beach, Fla. at 6.5 percent.
Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015. Net absorption of industrial space nationally is seen at 107.8 million square feet in 2014 and 107.1 million next year.