Commercial Real Estate Markets Show Modest Growth, Shifts In Purchases

Commercial real estate leasing patterns are showing steady but modest growth, according to the National Association of Realtors' (NAR) quarterly commercial real estate forecast.

Lawrence Yun, chief economist for NAR, projects only modest changes in the coming year. ‘Jobs are the key driver for commercial real estate, and the accumulation of 7 million net new jobs from the low point a few years ago is steadily showing up as demand for leasing and purchases of properties,’ he says. ‘But the difficulty of accessing loans remains a hindrance to a faster recovery.’

NAR's recent Commercial Real Estate Quarterly Market Survey shows that the gross domestic product rose from 2.5% in the second quarter to 2.9% in the third quarter. It also shows a 2% rise in leasing activity the third quarter from the second quarter, and higher sales levels than a year ago.

Yun says there have been some shifts in commercial purchases. ‘Investors have been looking for better yields and have found good potential in smaller commercial properties, notably in secondary and tertiary markets,’ he explains.

‘Sales of commercial properties costing less than $2.5 million in the third quarter were 11 percent above a year ago, while prices for smaller properties were four percent above the third quarter of 2012,’ he notes.

Commercial investment in properties costing more than $2.5 million rose 26% from a year ago, while prices for large properties were 9% above the third quarter of 2012, according to the data.

NAR says national vacancy rates over the coming year are forecast to decline 0.2 percentage points in the office market, 0.6 points in industrial and 0.5 points for retail real estate. The average multifamily vacancy rate will edge up 0.1%, but that sector continues to see the tightest availability and biggest rent increases, notes NAR.

NAR predicts the following for specific markets:

Office markets

– Vacancy rates in the office sector are expected to decline from a projected 15.6% in the fourth quarter to 15.4% in the fourth quarter of 2014.

– The markets with the lowest office vacancy rates presently (in the fourth quarter) are New York City, with a vacancy rate of 9.8%; Washington, D.C., at 9.9%; Little Rock, Ark., 12.0%; and Nashville, Tenn., 12.9%.

– Office rents should increase 2.4% this year and 2.5% 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 32.2 million square feet this year and 46.1 million in 2014.

Industrial markets

– Industrial vacancy rates are likely to fall from 9.2% in the fourth quarter of this year to 8.6% in the fourth quarter of 2014.

– The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.9%; Los Angeles, at 4.0%; Miami, at 6.0%; and Seattle, at 6.3%.

– Annual industrial rents are expected to rise 2.3% this year and 2.5% in 2014. Net absorption of industrial space nationally is anticipated at 97.0 million square feet in 2013 and 104.9 million next year.

Retail Markets

– Retail vacancy rates are forecast to decline from 10.4% in the fourth quarter of this year to 9.9% in the fourth quarter of 2014.

– Presently, markets with the lowest retail vacancy rates include Fairfield County, Conn., at 3.9%; San Francisco, at 4.0%; Long Island, N.Y., at 5.2%; and Northern New Jersey at 5.3%.

– Average retail rents should increase 1.4% in 2013 and 2.2% next year. Net absorption of retail space is projected at 11.0 million square feet in 2013 and 18.1 million next year.

Multifamily Markets

– The apartment rental market (multifamily housing) is likely to see vacancy rates edge up 0.1 percentage points from 3.9% in the fourth quarter, to 4.0% in the fourth quarter of 2014, with new construction helping to meet higher demand. As a rule, vacancy rates below 5% are considered a landlord's market, with demand justifying higher rent.

– Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 1.9%; Syracuse, N.Y., at 2.0%; Minneapolis and San Diego, at 2.1% each; and New York City, at 2.2%.

– Average apartment rents are forecast to rise 4.0% this year and 4.3% in 2014. Multifamily net absorption is projected to total 239,400 units in 2013 and 211,300 next year.


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