Vacancy rates generally are tightening in commercial real estate sectors with modest rent growth, according to the National Association of Realtors (NAR) quarterly commercial real estate forecast. Lawrence Yun, NAR chief economist, said commercial real estate is on a more moderate growth path. “Office vacancies haven’t declined much because total jobs today are still below that of the pre-recession level in 2007, but rising international trade is boosting demand for warehouse space,” he said. “Consumer spending has been favorable for the retail market, and rising construction is keeping apartment availability fairly even, though at low vacancy levels. That, in turn, is pushing apartment rents to rise twice as fast as broad consumer prices and average wage growth.”
National vacancy rates over the coming year are forecast to decline 0.2 percentage point in the office market, 0.6 point in industrial, and 0.6 point for retail; however, the average multifamily vacancy rate is unlikely to change, with that sector continuing to experience the tightest availability and biggest rent increases.
NAR’s latest Commercial Real Estate Outlook offers overall 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., a source of commercial real estate performance information.
Vacancy rates in the office sector are expected to decline from a projected 15.7 per cent in the third quarter to 15.5 per cent in the third quarter of 2014. The markets with the lowest office vacancy rates presently (in the third quarter) are Washington, D.C., with a vacancy rate of 9.7 per cent; New York City, at 9.8 per cent; Little Rock, Ark., 12.1 per cent; and Birmingham, Ala., 12.4 per cent.
Office rents should increase 2.5 per cent this year and 2.8 per cent in 2014. 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 seen at 30.1 million square feet this year and 41.6 million in 2014.
Industrial vacancy rates are likely to fall from 9.3 per cent in the third quarter of this year to 8.7 per cent in the third quarter of 2014. The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.8 per cent; Los Angeles, 4.0 per cent; Miami, 5.9 per cent; and Seattle at 6.4 per cent. Annual industrial rents are expected to rise 2.4 per cent this year and 2.6 per cent in 2014. Net absorption of industrial space nationally is anticipated at 102.0 million square feet in 2013 and 105.8 million next year.
Retail vacancy rates are forecast to decline from 10.6 per cent in the third quarter of this year to 10.0 per cent in the third quarter of 2014. Presently, markets with the lowest retail vacancy rates include San Francisco, 3.9 per cent; Fairfield County, Conn., at 4.1 per cent; Long Island, N.Y., 5.0 per cent; and Orange County, Calif., at 5.5 per cent. Average retail rents should increase 1.5 per cent in 2013 and 2.3 per cent next year. Net absorption of retail space is projected at 11.8 million square feet in 2013 and 18.2 million next year.
The apartment rental market — multifamily housing — is likely to see vacancy rates edge up only 0.1 percentage point from 3.9 per cent in the third quarter to 4.0 per cent in the third quarter of 2014, with construction rising to meet increased demand. Generally, vacancy rates below 5 per cent are considered a landlord’s market where demand justifies higher rent. Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 1.9 per cent; Syracuse, N.Y., 2.0 per cent; New York City and San Diego, at 2.1 per cent each; and Minneapolis, 2.2 per cent. Average apartment rents are forecast to rise 4.0 per cent this year and another 4.0 per cent in 2014. Multifamily net absorption is projected to total 266,700 units in 2013 and 259,800 next year.