Commercial Real Estate Forecast 2015

(bps=basis point) Credit: National Association of Realtors®

National office vacancy rates are forecast to slightly decrease 0.1% over the coming year as the demand for office space slowly improves, according to the National Association of Realtors® (NAR) quarterly commercial real estate forecast. The vacancy rate for industrial space is expected to decline 0.3% and retail space 0.4% as manufacturing output increases and low gas prices and slight income gains boost consumer spending. An influx in new apartment construction is forecast to cause an uptick (0.1%) in the multifamily vacancy rate.

Lawrence Yun, NAR chief economist, says commercial rents have risen at a moderate pace across the board for several quarters now and vacancy rates have been on a gradual decline. “The commercial real estate sector is on the path to recovery, but subpar economic growth, lack of financing available to small investors and the industry trend towards squeezing more employees into existing spaces will keep demand from meaningful acceleration,” he said. “The exception is multifamily housing, which remains the best performer with vacancy rates under 4% in several markets in the Northeast and in California.”

Looking ahead, Yun expects the economy to slowly pick up in upcoming quarters after severe winter weather, a widening trade gap and port disputes on the West Coast dragged on gross domestic product growth in the first quarter. “Similar to last year, economic growth will likely rebound as the year progresses, although perhaps not as robustly as what was seen in 2014. However, as long as jobs are being added at a respectable pace, gradual increases in demand for commercial spaces and leasing projects should continue.”

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.

Office Markets

Office vacancy rates are forecast to slightly decline from 15.6% in the second quarter to 15.5% in the second quarter of 2016.

The markets with the lowest office vacancy rates in the second quarter are New York City, at 8.9%; Washington, D.C., at 9%; San Francisco, at 10.6%; and Little Rock, AR and Portland, OR at 11.6%.

Office rents are projected to increase 3.4% this year and 3.7% in 2016. 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 51.8 million square feet this year and 60 million in 2016.

Industrial Markets

Industrial vacancy rates are expected to fall from 8.4% in the second quarter to 8.1% in the second quarter of 2016.

The areas with the lowest industrial vacancy rates currently are Orange County, CA, with a vacancy rate of 3.4%; Los Angeles, 3.6%; Miami, at 5.3%; Seattle, at 5.4%; and Palm Beach, FL at 5.5%.

Annual industrial rents should rise at a clip of 3.1% both this year and in 2016. Net absorption of industrial space nationally is expected to total 108.8 million square feet in 2015 and 104.9 million square feet next year.

Retail Markets

Vacancy rates in the retail market are expected to decline from 9.6% currently to 9.2% in the second quarter of 2016.

Currently, the markets with the lowest retail vacancy rates include San Francisco, at 3.0%; Orange County and San Jose, CA at 4.6%; Fairfield County, CT at 4.7%; and Long Island, NY, 4.9%.

Average retail rents are forecast to rise 2.6% this year and 3.1% in 2016. Net absorption of retail space is likely to total 15.8 million square feet this year and jump to 21.1 million in 2016.

Multifamily Markets

The apartment rental market should see vacancy rates slightly increase from 4.3% currently to 4.4% in the second quarter of 2016. Vacancy rates below 5% are generally considered a landlord’s market, with demand justifying higher rent.

Areas with the lowest multifamily vacancy rates currently are San Bernardino-Riverside, CA at 2.5%; Sacramento, CA at 2.6%; New Haven, CT, and Providence, RI at 2.7%; and Cleveland, OH, Oakland-East Bay, CA, and San Diego at 2.8%.