Commercial real estate improving but at a slower pace

March 7, 2014

The commercial real estate market in the U.S. is showing continued improvement but at a more moderate rate, according to the National Association of Realtors® quarterly commercial real estate forecast.

Although things have tapered off, the commercial real estate growth is still on an upward path. Different segments of the commercial real estate industry will see varied levels of growth, with some even seeing slowdowns.

“Office demand is expected to see only slow and gradual improvement. Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space. Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners,” Yun said.

According to the Commercial Real Estate Outlook report, apartment investments totaled more than $103 billion in 2013, followed closely by office transactions, which totaled $101.5 billion.

Office Market

NAR forecasts vacancy rates in the office sector to decline from 15.8 percent in the first quarter of this year to 15.6 percent in the first quarter of 2015.

Markets with the lowest office vacancy rates in the first quarter are as follows:

  • New York City – 9.5 percent
  • Washington, D.C. – 10.2 percent
  • Little Rock, Ark. – 11.6 percent
  • Birmingham, Ala. – 12.7 percent
  • San Francisco – 12.8 percent
  • Nashville, Tenn. – 12.8 percent

NAR expects office rents to increase 2.3 percent in 2014 and 3.2 percent in 2015. This doesn’t come as very surprising news, as prices typically go up with rising demand.

Industrial Market

Vacancy rates in the industrial market are expected to drop from 9.0 percent in the first quarter to 8.9 percent in the first quarter 2015.

Markets with the lowest industrial vacancy rates currently include…

  • Orange County, Calif. – 3.7 percent
  • Los Angeles – 3.8 percent
  • Miami – 5.8 percent
  • Seattle – 5.9 percent
  • San Riverside/Bernardino, Calif. – 6.1 percent

Annual rents for industrial spaces are expected to rise 2.4 percent this year and 2.6 percent next year, according to NAR.

Retail Market

Retail vacancies are forecast to fall slightly from 10.2 percent in the first quarter of this year to 9.9 percent in the first quarter of 2015.

Currently, the following markets have the lowest retail vacancy rates:

  • San Francisco – 3.1 percent
  • Fairfield County, Conn. – 3.8 percent
  • Long Island, N.Y. – 4.8 percent
  • San Jose, Calif. – 5.2 percent
  • Northern New Jersey – 5.3 percent
  • Orange County, Calif. – 5.3 percent

Multifamily Market

Multifamily housing – specifically the apartment rental market – should see vacancy rates edge up from 4.0 percent in the first quarter to 4.1 percent in the first quarter 2015. Additional supply will likely help meet growing demand. According to NAR, vacancy rates below 5 percent are generally considered a landlord’s market, with demand justifying higher rents.

The areas with the lowest multifamily vacancy rates are as follows:

  • New Haven, Conn. – 2.1 percent
  • Minneapolis – 2.3 percent
  • New York City – 2.3 percent
  • Oakland-East Bay, Calif. – 2.5 percent
  • San Diego – 2.5 percent

Average apartment rents are projected to rise 4.3 percent this year and 3.5 percent in 2015, NAR reports.

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