Commercial Real Estate Vacancies Slowly Declining, Rents Rising
WASHINGTON (November 26, 2012) – Most of the major commercial real estate sectors show gradually improving fundamentals and are easily absorbing the relatively small amount of new space that is coming online, with a full recovery already in the multifamily market, according to the National Association of Realtors® quarterly commercial real estate forecast.
Lawrence Yun , NAR chief economist, said the market has been slowly building momentum. "Job creation is the key to increasing demand in the commercial real estate sectors," he said. "The economy is expected to grow 2.5 percent next year, and with modest job creation, assuming there is no fiscal cliff, the demand for commercial space will gradually rise. The greatest friction that remains is a tight credit environment, notably for smaller properties."
Vacancy rates over the next four quarters are forecast to decline 1.0 percentage point in the office market, 0.6 point in industrial, 0.2 point for retail and 0.1 point in multifamily; however, multifamily has the tightest availability and is experiencing the strongest rent increases, well above the rate of inflation.
"The primary factor holding back greater job creation has been uncertainty over regulations and associated costs," Yun said. "With the elections behind us and Washington apparently resolved to prevent a fiscal cliff, it's hoped that ambiguity over regulatory issues will clear relatively soon so employers can understand the rules of the game and the layout of the field."
NAR's latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc.,2 a source of commercial real estate performance information.
Vacancy rates in the office sector are projected to fall from an estimated 16.7 percent in the fourth quarter to 15.7 percent in the fourth quarter of 2013.
The markets with the lowest office vacancy rates presently (in the fourth quarter) are Washington, D.C., with a vacancy rate of 9.6 percent; New York City, at 10.1 percent; and New Orleans, 12.9 percent.
Office rent is expected to increase 2.0 percent this year and 2.5 percent in 2013. 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 21.7 million square feet in 2012 and 49.0 million next year.
Industrial vacancy rates should decline from 10.1 percent in the fourth quarter of this year to 9.5 percent in the fourth quarter of 2013.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.3 percent; Los Angeles, 4.4 percent; and Miami at 6.5 percent.
Annual industrial rent is forecast to rise 1.7 percent in 2012 and 2.2 percent next year. Net absorption of industrial space nationally will probably total 93.4 million square feet this year and 89.6 million in 2013.
Retail vacancy rates are expected to ease from 10.8 percent in the fourth quarter to 10.6 percent in the fourth quarter of 2013.
Presently, markets with the lowest retail vacancy rates include San Francisco and Fairfield County, Conn., both at 3.9 percent; Long Island, N.Y., 5.1 percent; and Orange County, Calif., 5.4 percent.
Average retail rent should increase 0.8 percent this year and 1.4 percent in 2013. Net absorption of retail space is estimated to be 9.1 million square feet this year and 19.8 million in 2013.
The apartment rental market - multifamily housing - is projected to see vacancy rates decline from 4.0 percent in the fourth quarter to 3.9 percent in the fourth quarter of 2013; vacancy rates below 5 percent are considered a landlord's market with demand justifying higher rents.
Areas with the lowest multifamily vacancy rates currently are Portland, Ore., at 2.1 percent; New York City, 2.2 percent; and Minneapolis, 2.3 percent.
Average apartment rent should increase 4.1 percent in 2012 and another 4.6 percent next year. Multifamily net absorption is likely to be 219,700 units this year and 234,600 in 2013.
The Commercial Real Estate Outlook is published by the NAR Research Division for the commercial community. NAR's Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; 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 78,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 232,000 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.
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1 Additional analyses will be posted under Economists' Outlook in the Research blog section of nar.realtor in coming days at: http://economistsoutlook.blogs.realtor.org/.
2 Beginning in the third quarter of 2011, NAR commercial forecasts have been generated based on historical data provided by REIS, Inc., and do not correspond with prior historical information from previous forecasts. This source permits coverage of more metro areas than were previously covered.
The next commercial real estate forecast and quarterly market report will be released on February 25 at 10:00 a.m. EST.