Commercial Markets Poised for Growth Despite Weaker Global Economy

WASHINGTON (February 19, 2015) – A stronger labor market and stable U.S. economy should keep commercial real estate demand on the rise, but the pace of growth will likely be hindered by overseas weakness, according to the National Association of Realtors® quarterly commercial real estate forecast.

National office vacancy rates are forecast to slightly decrease 0.1 percent over the coming year as improved hiring increases the demand for office space. The vacancy rate for industrial space is expected to decline 0.4 percent and retail space 0.3 percent as manufacturers boost production for goods and services and consumers slightly accelerate their spending. A swath of new apartment construction coming onto the market is forecast to lead to an uptick (0.1 percent) in the multifamily vacancy rate.

Lawrence Yun, NAR chief economist, expects commercial real estate activity to hold steady heading into the spring. "The demand for leases and new construction projects is expected to slowly climb as businesses add to their payrolls and consumers reap the benefits of cheaper gas and any accompanying wage growth from a tighter labor market," he said. "Furthermore, multifamily housing continues to be the top-performing sector with current rental demand exceeding supply – leading to rent growth that is easily outpacing inflation in many metro areas throughout the country."

Although economic conditions are improving at home, Yun says weaknesses in the global economy will likely impact exports. "Sluggishness overseas alongside a strengthening U.S. dollar will widen the trade deficit and slow economic growth potential," he said. "However, GDP is forecasted to come in around 3 percent in 2015 – the highest since the recession. Improvements in housing and commercial real estate market activity will measurably help economic growth."

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 is provided by REIS Inc., a source of commercial real estate performance information.

In partnership with Deloitte and RERC Situs, NAR released an annual joint report earlier this month – Expectations & Market Realities in Real Estate 2015 – which forecasts for an expected increase in commercial real estate value and pricing in 2015.

Office Markets

Office vacancy rates are forecast to slightly decline from 15.8 percent in the first quarter to 15.7 percent in the first quarter of 2016.

The markets with the lowest office vacancy rates in the first quarter are Washington, D.C., at 8.7 percent; New York City, 9.0 percent; Little Rock, Ark., and Seattle at 11.5 percent; and San Francisco, at 12.0 percent.

Office rents are projected to increase 3.3 percent in 2015 and 3.6 percent next year. Net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 47.7 million square feet this year and 58.3 million in 2016.

Industrial Markets

Industrial vacancy rates are expected to fall from 8.7 percent in the first quarter to 8.3 percent in the first quarter of 2016.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.4 percent; Los Angeles, 3.7 percent; Miami and Palm Beach, Fla., both at 5.4 percent; and Seattle, at 5.6 percent.

Annual industrial rents should rise 3.0 percent this year and 3.1 percent in 2016. Net absorption of industrial space nationally is expected to total 102.2 million square feet in 2015 and 104.8 million square feet next year.

Retail Markets

Vacancy rates in the retail market are expected to decline from 9.7 percent currently to 9.5 percent in the first quarter of 2016.

Currently, the markets with the lowest retail vacancy rates include San Francisco, at 3.0 percent; Fairfield County, Conn., and San Jose, Calif., at 4.5 percent; Long Island, N.Y., 4.9 percent; and Orange County, Calif., at 5.0 percent.

Average retail rents are forecast to rise 2.5 percent in 2015 and 3.1 percent next year. Net absorption of retail space is likely to total 15.7 million square feet this year and jump to 20.6 million in 2016.

Multifamily Markets

The apartment rental market should see vacancy rates slightly increase from 4.1 percent currently to 4.3 percent in the first quarter of 2016. 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 Sacramento, Calif., 2.5 percent; Orange County, Calif., 2.6 percent; Hartford, Conn., and Oakland-East Bay at 2.7 percent; and Rochester, N.Y., at 2.8 percent.

Average apartment rents are projected to rise 3.7 percent this year and 3.6 percent in 2016. Multifamily net absorption is expected to total 171,978 units in 2015 and 157,168 next year.

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.