NAR: Improving economy brightens commercial outlook
WASHINGTON – Aug. 26, 2014 – The second quarter's strong rebound and job creation improved the outlook for all major commercial real estate sectors, according to the National Association of Realtors® (NAR) quarterly commercial real estate forecast.
"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 Lawrence Yun, NAR chief economist. "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."
After many false starts, the economy finally appears to be turning a corner to firmer ground, Yun adds. "The economy can handle the inevitable rise in interest rates as long as commercial rents steadily rise to generate investor returns."
U.S. office vacancy rates should 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 percent), while retail space is forecast to decline 0.2 percent behind favorable gains in personal income and consumer spending.
"New construction for multifamily housing has picked up in recent months and looks to be alleviating the short supply," says Yun. "However, the demand for rental housing continues to show strength. As a result, rent growth will outpace broad consumer inflation in upcoming years."
NAR's latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors. Historic data for metro areas was provided by REIS Inc.
Office vacancy rates are forecast to remain unchanged at 15.7 percent through the third quarter of 2015.
Currently, the markets with the lowest office vacancy rates in the third quarter are Washington, D.C., at 9.3 percent; New York City, 9.6 percent; Little Rock, Ark., 11.5 percent; San Francisco, 12.4 percent; and New Orleans, at 12.7 percent.
Office rents are projected to increase 2.6 percent in 2014 and 3.2 percent in 2015. 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 36.2 million square feet this year and 50.7 million in 2015.
Industrial vacancy rates are expected to fall from 8.9 percent in the third quarter to 8.5 percent in the third 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, 3.8 percent; Seattle, 5.9 percent; Miami, 6.1; and Palm Beach, Fla., at 6.6 percent.
Annual industrial rents should rise 2.4 percent this year and 2.8 percent in 2015. Net absorption of industrial space nationally is seen at 107.6 million square feet in 2014 and 104.9 million next year.
Vacancy rates in the retail market are expected to decline from 9.8 percent currently to 9.6 percent in the third 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; Long Island, N.Y., 5.2 percent; and Orange County, Calif., at 5.3 percent.
Average retail rents are forecast to rise 2.0 percent in 2014 and 2.4 percent next year. Net absorption of retail space is likely to total 11.2 million square feet this year and 19.3 million in 2015.
The apartment rental market – multifamily housing – should see vacancy rates slightly decline from 4.1 percent currently to 4.0 percent in the third 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., Providence, R.I., and Sacramento, Calif., at 2.2 percent; and two Connecticut cities (New Haven and Hartford) at 2.5 percent.
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.© 2014 Florida Realtors®