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Improving Economy Slowly Brightens Outlook for Commercial Real Estate

Media Contact: Adam DeSanctis / 202-383-1178 / Email

WASHINGTON (August 26, 2014) – The strong rebound in economic growth during the second quarter and ongoing job creation are gradually improving the outlook for all of the major commercial real estate sectors, according to the National Association of Realtors® quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, says after many false starts, the economy finally appears to be turning a corner to firmer ground. “The job market has been the bright spot of the economy this year as employers are feeling more confident about their growth prospects and adding to their payrolls,” he said. “This gradual turnaround from being overly cautious to more optimistic should slightly boost the demand for leasing and purchase activity as well as new construction projects in the upcoming year.”

Yun adds, “The economy can handle the inevitable rise in interest rates as long as commercial rents steadily rise to generate investor returns.” 

National office vacancy rates are forecast to remain unchanged over the coming year, mostly due to added inventory entering the market. Rising exports and a shrinking trade deficit should lead to a declining vacancy rate for industrial space (0.4 percent), while retail space is forecast to decline 0.2 percent behind favorable gains in personal income and consumer spending.

“New construction for multifamily housing has picked up in recent months and looks to be alleviating the short supply,” said Yun. “However, the demand for rental housing continues to show strength. As a result, rent growth will outpace broad consumer inflation in upcoming years.”

NAR’s latest Commercial Real Estate Outlook1 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.

Office Markets
Office vacancy rates are forecast to remain unchanged at 15.7 percent through the third quarter of 2015.

Currently, the markets with the lowest office vacancy rates in the third quarter are Washington, D.C., at 9.3 percent; New York City, 9.6 percent; Little Rock, Ark., 11.5 percent; San Francisco, 12.4 percent; and New Orleans, at 12.7 percent.

Office rents are projected to increase 2.6 percent in 2014 and 3.2 percent next year. 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 36.2 million square feet this year and 50.7 million in 2015.

Industrial Markets 
Industrial vacancy rates are expected to fall from 8.9 percent in the third quarter to 8.5 percent in the third quarter of 2015.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.5 percent; Los Angeles, 3.8 percent; Seattle, 5.9 percent; Miami, 6.1; and Palm Beach, Fla., at 6.6 percent.

Annual industrial rents should rise 2.4 percent this year and 2.8 percent in 2015. Net absorption of industrial space nationally is seen at 107.6 million square feet in 2014 and 104.9 million next year.

Retail Markets
Vacancy rates in the retail market are expected to decline from 9.8 percent currently to 9.6 percent in the third quarter of 2015.

Currently, the markets with the lowest retail vacancy rates include San Francisco, at 3.5 percent; Fairfield County, Conn., 3.9 percent; San Jose, Calif., 4.6 percent; Long Island, N.Y., 5.2 percent; and Orange County, Calif., at 5.3 percent.

Average retail rents are forecast to rise 2.0 percent in 2014 and 2.4 percent next year. Net absorption of retail space is likely to total 11.2 million square feet this year and 19.3 million in 2015.

Multifamily Markets
The apartment rental market – multifamily housing – should see vacancy rates slightly decline from 4.1 percent currently to 4.0 percent in the third quarter of 2015. Vacancy rates below 5 percent are generally considered a landlord’s market, with demand justifying higher rent.

Areas with the lowest multifamily vacancy rates currently are Orange County, Calif., Providence, R.I., and Sacramento, Calif., at 2.2 percent; and two Connecticut cities (New Haven and Hartford) at 2.5 percent. 

Average apartment rents are projected to rise 4.0 this year and in 2015. Multifamily net absorption is expected to total 223,400 units in 2014 and 171,000 next year.

The Commercial Real Estate Outlook is published by the NAR Research Division. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.

The NAR commercial community includes commercial members; commercial real estate boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.

Approximately 70,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 283,000 members offer commercial real estate services as a secondary business.

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.

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1Additional analyses will be posted under Economists’ Outlook in the Research blog section of Realtor.org in coming days at: http://economistsoutlook.blogs.realtor.org/.

The next commercial real estate forecast and quarterly market report will be released on November 24 at 10:00 a.m. EDT.