Commercial Real Estate Vacancy Rates Improving, Rents Firming

According to the National Association of Realtors? quarterly commercial real estate forecast, all of the major commercial real estate sectors are seeing improved fundamentals, but multifamily housing is becoming a landlord?s market commanding bigger rent increases. These trends also are confirmed in NAR?s recent quarterly Commercial Real Estate Market Survey.

Lawrence Yun, NAR chief economist, said vacancy rates are improving in all of the major commercial real estate sectors. ?Sustained job creation is benefiting commercial real estate sectors by increasing demand for space,? he said. ?Vacancy rates are steadily falling. Leasing is on the rise and rents are showing signs of strengthening, especially in the apartment market where rents are rising the fastest.?

NAR forecasts commercial vacancy rates over the next year to decline 0.4 percentage point in the office sector, 0.8 point in industrial real estate, 0.9 point in the retail sector and 0.2 percentage point in the multifamily rental market.

?Household formation appears to be rising from pent-up demand,? Yun said. ?The tight apartment market should encourage more apartment construction. Otherwise, rent increases could further accelerate in the near-to-intermediate term.?

The Society of Industrial and Office Realtors? shows a notable gain in its SIOR Commercial Real Estate Index, an attitudinal survey of 297 local market experts.¹

The SIOR index, measuring the impact of 10 variables, jumped 8.3 percentage points to 63.8 in the fourth quarter, following a gain of 0.6 percentage point in the third quarter. The index remains well below the level of 100 that represents a balanced marketplace, which was last seen in the third quarter of 2007.

Most market indicators posted advances in the fourth quarter, but 71 percent of respondents said leasing activity is below historic levels in their market ? an improvement from 83 percent in the third quarter. Only 29 percent report there is ample sublease space available.

Office and industrial space remains a tenant?s market ? 87 percent of participants feel that tenants are getting a range of benefits ranging from moderate concessions to deep rent discounts.

Construction activity is still low, with 95 percent of experts reporting it is below normal, and 83 percent said it is a buyers? market for development acquisitions; prices are below construction costs in 78 percent of markets.

Participants are broadly expecting stronger conditions for the current quarter, with two out of three expecting market improvement.

NAR?s latest Commercial Real Estate Outlook² offers 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.,³ a source of commercial real estate performance information.

Office Markets
Vacancy rates in the office sector are projected to fall from 16.4 percent in the current quarter to 16.0 percent in the first quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.5 percent; New York City, at 10.0 percent; and New Orleans, 12.4 percent.

After rising 1.6 percent in 2011, office rents should increase another 1.9 percent this year and 2.4 percent in 2013. 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 forecast at 20.1 million square feet in 2012 and 28.1 million next year.

Industrial Markets
Industrial vacancy rates are likely to decline from 11.7 percent in the first quarter of this year to 10.9 percent in the first quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.8 percent; Los Angeles, 4.9 percent; and Miami at 7.6 percent.

Annual industrial rent is expected to rise 1.8 percent in 2012 and 2.3 percent next year. Net absorption of industrial space nationally is seen at 40.6 million square feet this year and 57.7 million in 2013.

Retail Markets
Retail vacancy rates are forecast to decline from 11.9 percent in the current quarter to 11.0 percent in the first quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.6 percent; Fairfield County, Conn., at 5.1 percent; and Long Island, N.Y., at 5.4 percent.

Average retail rent should rise 0.7 percent this year and 1.2 percent in 2013. Net absorption of retail space is projected at 9.9 million square feet this year and 23.9 million in 2013.

Multifamily Markets
The apartment rental market ? multifamily housing ? is likely to see vacancy rates drop from 4.7 percent in the first quarter to 4.5 percent in the first quarter of 2013; multifamily vacancy rates below 5 percent generally are considered a landlord?s market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New York City, 1.8 percent; Minneapolis and Portland, Ore., each at 2.5 percent; and San Jose, Calif., at 2.7 percent.

After rising 2.2 percent last year, average apartment rent is expected to increase 3.8 percent in 2012 and another 4.0 percent next year. Multifamily net absorption is forecast at 209,900 units this year and 223,600 in 2013.

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

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