The commercial real estate market continued to improve in the fourth quarter of 2013 – albeit at a much slower pace than in previous quarters – according to the National Association of Realtors' (NAR) quarterly commercial real estate forecast, which analyzes the office, industrial, retail and multifamily markets.
Of the office market, Lawrence Yun, chief economist for NAR, says despite the addition of jobs in recent months, ‘companies appear hesitant to add new space.’
‘Office demand is expected to see only slow and gradual improvement,’ he says.
Meanwhile, ‘demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space,’ Yun adds.
‘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 says.
NAR forecasts that the office vacancy rate will decline about 0.2% in the coming year, while industrial will decline about 0.1%, and retail will decline about 0.3%.
Meanwhile, the multifamily vacancy rate will edge up 0.1%, driven in part by new construction; however, limited availability and rising rents will have the effect of limiting growth in this sector.
NAR predicts that office vacancy rates will decline from 15.8% in the first quarter of this year to 15.6% in the first quarter of 2015. Currently, markets with the lowest office vacancy rates include New York City, with a vacancy rate of 9.5%; Washington, D.C., at 10.2%; Little Rock, Ark., 11.6%; Birmingham, Ala., 12.7%; and San Francisco and Nashville, Tenn., at 12.8% each.
The firm forecasts that office rents will rise 2.3% in 2014 and 3.2% 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 44.6 million square feet this year and 50 million in 2015.
NAR forecasts that industrial vacancy rates will fall from 9% in the first quarter to 8.9% in the first quarter of 2015. Areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.7%; Los Angeles, 3.8%; Miami, 5.8%; Seattle at 5.9%; and San Riverside/Bernardino, Calif., at 6.1%.
Rents for industrial properties are expected to rise about 2.4% in 2014 and 2.6% in 2015, according to NAR. Net absorption of industrial space nationally is seen at 106.1 million square feet in 2014 and 110.6 million next year.
Retail vacancy rates are expected to decline from 10.2% in the first quarter of this year to 9.9% in the first quarter of 2015. Presently, markets with the lowest retail vacancy rates include San Francisco, at 3.1%; Fairfield County, Conn., 3.8%; Long Island, N.Y., 4.8%; San Jose, Calif., 5.2%; and Northern New Jersey and Orange County, Calif., at 5.3% each.
Retail rents are forecast to rise 2% in 2014 and 2.3% next year, NAR says. Net absorption of retail space is likely to total 14.6 million square feet this year and 20.9 million in 2015.
Vacancy rates in multifamily housing are expected to rise from the current 4% to 4.1% in the first quarter of 2015, with additional supply helping to meet growing demand.
NAR points out that 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 2.1%; Minneapolis and New York City, 2.3%; and Oakland-East Bay, Calif., and San Diego, at 2.5% each.
Apartment rents are projected to rise 4.3% this year and 3.5% in 2015, on average, NAR forecasts. Multifamily net absorption is expected to total 204,900 units in 2014 and 112,500 next year.