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Washington, D.C. — Feb. 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's 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 said, 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. 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.
Here's a closer look at two of the markets.
• Office vacancy rates: These 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 percent; Little Rock, Ark., and Seattle at 11.5 percent; and San Francisco, at 12 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.
• Retail market: Vacancy rates in this 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 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 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.
The National Association of Realtors is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries. For more information, visit www.realtor.org.