DAILY NEWS Nov 29, 2012 9:00 AM - 0 comments

U.S. commercial real estate vacancies slowly declining, rents rising

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WASHINGTON, DC 2012-11-29

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 (NAR) 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 per cent 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 per centage 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."

Office Markets

Vacancy rates in the office sector are projected to fall from an estimated 16.7 per cent in the fourth quarter to 15.7 per cent 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 per cent; New York City, at 10.1 per cent; and New Orleans, 12.9 per cent.

Office rent is expected to increase 2.0 per cent this year and 2.5 per cent 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 Markets

Industrial vacancy rates should decline from 10.1 per cent in the fourth quarter of this year to 9.5 per cent 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 per cent; Los Angeles, 4.4 per cent; and Miami at 6.5 per cent.

Annual industrial rent is forecast to rise 1.7 per cent in 2012 and 2.2 per cent 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 Markets

Retail vacancy rates are expected to ease from 10.8 per cent in the fourth quarter to 10.6 per cent 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 per cent; Long Island, N.Y., 5.1 per cent; and Orange County, Calif., 5.4 per cent.

Average retail rent should increase 0.8 per cent this year and 1.4 per cent in 2013. Net absorption of retail space is estimated to be 9.1 million square feet this year and 19.8 million in 2013.

Multifamily Markets

The apartment rental market -- multifamily housing -- is projected to see vacancy rates decline from 4.0 per cent in the fourth quarter to 3.9 per cent in the fourth quarter of 2013; vacancy rates below 5 per cent 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 per cent; New York City, 2.2 per cent; and Minneapolis, 2.3 per cent.

Average apartment rent should increase 4.1 per cent in 2012 and another 4.6 per cent next year. Multifamily net absorption is likely to be 219,700 units this year and 234,600 in 2013.

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