Commercial Sectors Surge on Improved Economy

After several false starts, the economy is finally gaining ground, and stronger growth is boosting the outlook for all of the major commercial real estate sectors, according to the National Association of REALTORS®’ quarterly commercial real estate forecast.

“The job market has been the bright spot of the economy this year, as employers are feeling more confident about their growth prospects and adding to their payrolls,” says Lawrence Yun, NAR’s chief economist. “This gradual turnaround from being overly cautious to more optimistic should slightly boost the demand for leasing and purchase activity as well as new-construction projects in the upcoming year. … The economy can handle the inevitable rise in interest rates as long as commercial rents steadily rise to generate investor returns.”

Here’s an overview of the four major commercial real estate sectors from NAR’s latest quarterly Commercial Real Estate outlook.

Office Markets

Vacancy rates for the office market is expected to remain unchanged at 15.7 percent in the third quarter of 2015. Office rents are forecasted to rise 2.6 percent this year and 3.2 percent next year.

Markets with the lowest office vacancy rates (third quarter 2014): Washington, D.C. (9.3%); New York City (9.6%); Little Rock, Ark. (11.5%); San Francisco (12.4%); and New Orleans (12.7%).

Industrial Markets

The industrial vacancy rate is projected to drop from 8.9 percent in the third quarter of this year to 8.5 percent in the third quarter of 2015. Annual rents are expected to rise 2.4 percent this year and 2.8 percent next year.

Markets with lowest industrial vacancy rates: Orange County, Calif. (3.5%); Los Angeles (3.8%); Seattle (5.9%); Miami (6.1%); and Palm Beach, Fla. (6.6%).

Retail Markets

The retail vacancy rate is forecasted to fall from 9.8 percent currently to 9.6 percent in the third quarter of 2015. Retail rents are projected to increase 2 percent this year and another 2.4 percent next year.

Markets with the lowest retail vacancy rates: San Francisco (3.5%); Fairfield County, Conn. (3.9%); San Jose, Calif. (4.6%); Long Island, N.Y. (5.2%); and Orange County, Calif. (5.3%).

Multifamily Markets

The apartment rental market is expected to see vacancy rates decline from 4.1 percent today to 4 percent in the third quarter of 2015. (Vacancy rates below 5 percent are considered a landlord’s market, and the high demand often justifies the higher rents.) Average apartment rents are forecasted to increase 4 percent this year as well as in 2015.

“New construction for multifamily housing has picked up in recent months and looks to be alleviating the short supply,” says Yun. “However, the demand for rental housing continues to show strength. As a result, rent growth will outpace broad consumer inflation in upcoming years.”

Markets with lowest multifamily vacancy rates: Orange County, Calif. (2.2%); Providence, R.I. (2.2%); Sacramento, Calif. (2.2%); New Haven, Conn. (2.5%); and Hartford, Conn. (2.5%).

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