Improvement Seen in Commercial Real Estate Sectors

WASHINGTON -- The outlook for all of the major commercial real estate sectors is improving slightly despite disappointing economic growth during the first quarter, reports the chief economist for the National Association of Realtors, Lawrence Yun. Sluggish growth in the period is not indicative of the health of the economy.

“Gross domestic product should expand closer to 3% for the remainder of the year," Yun said Wednesday. "The improved lending for commercial loans and continuing job gains we’ve seen this spring bode well for modest progress in commercial real estate leases and purchases of properties.”

However, Yun cautions, with rising long-term interest rates on the horizon, consistent economic growth is imperative to solid commercial real estate investment.

National vacancy rates in the office market are forecast to decline 0.2% over the next 12 months, while international trade gains continue to boost the use of industrial space, which forecasts a decline of 0.3 point, according to the association’s Commercial Real Estate Outlook. The outlook for personal income and consumer spending is favorable for the retail market, likely leading to a vacancy decline of 0.2%. “The multifamily sector continues to be the top performer in commercial real estate with the lowest vacancy rates," Yun noted. "However, tight availability -- despite new construction -- is causing rents to rise near 4% annually in many markets. Many renters who are getting squeezed may begin to view homeownership as a more favorable, long-term option.”

Office vacancy rates should decline from an expected 15.8% this quarter to 15.6% in the second quarter of 2015. Currently, the markets with the lowest office vacancy rates are New York City and Washington, D.C., at 9.4%; Little Rock, Ark., 11.5%; San Francisco, 12.6%; and New Orleans, at 12.8%.

Office rents are projected to increase 2.5% this year and 3.2% next year. Net absorption of office space in the United States, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 39.7 million square feet this year and 49.8 million in 2015.

Industrial vacancy rates are anticipated to fall from 9% this quarter to 8.7% in the second quarter of 2015. The areas with the lowest industrial vacancy rates are Orange County, Calif., with a rate of 3.5%; Los Angeles, 3.9%; Miami and Seattle, 6%, and Palm Beach, Fla., at 6.5%.

Annual industrial rents should rise 2.4% this year and 2.6% in 2015. Net absorption of industrial space nationally is seen at 107.8 million square feet in 2014 and 107.1 million next year.

Vacancy rates in the retail market are expected to decline from 10% currently to 9.8% in the second quarter of 2015. At present, the major markets with the lowest retail vacancy rates are San Francisco, at 3.2%; Fairfield County, Conn., 3.8%; and San Jose, Calif., at 4.7%. Northern New Jersey, Long Island, N.Y., and Orange County, Calif., all have vacancy rates of 5.3%.

Average retail rents are forecast to rise 2% in 2014 and 2.3 % next year. Net absorption of retail space is likely to total 11.5 million square feet this year and 19.6 million in 2015.

The apartment rental market -- multifamily housing -- should see vacancy rates edge up from 4% this quarter to 4.1% in the second quarter of 2015, with added supply helping to meet growing demand. Vacancy rates below 5% are generally considered a landlords’ market, with demand justifying higher rent. Areas with the lowest multifamily vacancy rates are New Haven, Conn., at 2.3%; Ventura County, Calif., 2.4%; and New York City, San Diego, Hartford, Conn., Oakland-East Bay, Calif., and San Diego, at 2.5% each.

Average apartment rents are projected to rise 4% this year and next. Multifamily net absorption is expected to total 221,400 units in 2014 and 173,100 next year.

SOURCE: National Association of Realtor

Published by The Business Journal, Youngstown, Ohio.
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