U.S. commercial real estate market improving

The outlook for all of the major commercial real estate sectors is slightly improving across the country despite disappointing economic growth during the first quarter of 2014.

According to the National Association of Realtors quarterly commercial real estate forecast and its chief economist Lawrence Yun, the sluggish growth experienced in the first quarter is not indicative of the actual health of the economy.

“Gross Domestic Product should expand closer to 3% for the remainder of the year,”.Yun said. “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 cautioned that with rising long-term interest rates on the horizon, consistent economic growth is imperative to solid commercial real estate investment in the years ahead.

National vacancy rates in the office market are forecast to decline 0.2 percentage points over the coming year, while international trade gains continue to boost use for industrial space, which forecasts a decline of 0.3 points.

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. However, tight availability, despite new construction, is causing rents to currently rise by nearly 4% annually in many markets,” said Yun. “Many renters who are getting squeezed may begin to view home ownership as a more favorable, long-term option.”

NAR reported earlier this month in its annual “Commercial Member Profile” that despite sub-par economic expansion, Realtors who practice commercial real estate saw an increase in sales transaction volume and medium gross annual income in 2013.

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

Office Markets

Office vacancy rates should decline from an expected 15.8% in the second quarter of this year to 15.6% in the second quarter of 2015. Currently, the markets with the lowest office vacancy rates in the second quarter 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% in 2014 and 3.2% 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 39.7 million square feet this year and 49.8 million in 2015.

Industrial Markets

Industrial vacancy rates are anticipated to fall from 9.0% in the second quarter to 8.7% in the second quarter of 2015.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.5%; Los Angeles, 3.9%; Miami and Seattle, 6.0%, 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.

Retail Markets

Vacancy rates in the retail market are expected to decline from 10.0% currently to 9.8% in the second quarter of 2015.

Presently, markets with the lowest retail vacancy rates include 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 a vacancy rate of 5.3%.

Average retail rents are forecast to rise 2.0% 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.

Multifamily Markets

The apartment rental market (multifamily housing) should see vacancy rates edge up from 4.0% in the second 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 landlord’s market, with demand justifying higher rent.

Areas with the lowest multifamily vacancy rates currently 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 4.0% this year and in 2015. Multifamily net absorption is expected to total 221,400 units in 2014 and 173,100 next year.