Modest Growth Expected in Commercial Real Estate Markets

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According to a quarterly report from the National Association of REALTORS® (NAR), a stronger labor market and increasing household formation should keep commercial real estate demand on a gradual incline. The report looks at vacancy rates and rents for the office, retail, industrial, and multi-family markets. According to the 2015 Commercial Lending Trends Survey, Realtor® commercial members in the past year managed transactions averaging $1.6 million per deal — frequently located in secondary and tertiary markets — and focused on small businesses and entrepreneurs.

Looking ahead, nationally, office vacancy rates are forecast to slightly decrease 0.1 percent over the coming year as the demand for office space slowly improves. The vacancy rate for industrial space is expected to decline 0.3 percent and retail space 0.4 percent 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 percent) 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. He notes that 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. The exception is multifamily housing.

According to Yun, job growth and increasing household formation among young adults is supporting the demand for apartments. However, vacancies are expected to slightly rise over the next year as a higher-than-anticipated climb in multifamily completions is coming onto the market to meet that demand.

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.  He cautioned that the growth may not be as robust as it was last year, but as long as jobs are added at a respectable pace, gradual increases in demand for commercial spaces and leasing projects should continue.

Office Markets

Office vacancy rates are forecast to slightly decline from 15.6 percent in the second quarter to 15.5 percent in the second quarter of 2016. In the Cleveland market, the rate was 22.8 percent.

The markets with the lowest office vacancy rates, ranging from 8.9 to 11.6 percent, are New York City; Washington, D.C.; San Francisco; Little Rock, AR; and Portland, OR.

Office rents are projected to increase 3.4 percent this year and 3.7 percent 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 60.0 million in 2016.

Industrial Markets

Industrial vacancy rates are expected to fall from 8.4 percent in the second quarter to 8.1 percent in the second quarter of 2016. Cleveland was showing with 8.8 percent, slightly above the national average.

The areas with the lowest industrial vacancy rates, ranging from 3.4 to 5.5 percent, currently are Orange County and Los Angeles, CA; Miami; Seattle; and Palm Beach, FL.

Annual industrial rents should rise at a clip of 3.1 percent 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 percent currently to 9.2 percent in the second quarter of 2016. The Cleveland metro market was showing a slightly higher rate at 13.9 percent.

Currently, the markets with the lowest retail vacancy rates, ranging from 3.0 to 4.9 percent, include San Francisco, Orange County and San Jose, CA; Fairfield County, CT; and Long Island, NY.

Average retail rents are forecast to rise 2.6 percent this year and 3.1 percent 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 percent currently to 4.4 percent in the second quarter of 2016. Vacancy rates below 5 percent are generally considered a landlord’s market, with demand justifying higher rent. The Cleveland metro market comes in at 2.8 percent and is among the lowest in the country.

Other areas with the lowest multifamily vacancy rates – all below 3.0 percent – currently are San Bernardino-Riverside, Oakland-East Bay, San Diego and Sacramento, CA; New Haven, CT; and Providence, RI.

With an influx of new supply coming onto the market, average apartment rents are projected to increase 3.6 percent this year and at a slower pace of 3.3 percent in 2016. Multifamily net absorption is expected to total 172,524 units in 2015 and 153,747 next year.

The NAR commercial community includes commercial members; commercial real estate boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations — CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.

For more information, please contact the ACAR staff at (216) 901-0130 or visit www.AkronClevelandRealtors.com.

The post above appears in the July edition of ACAR’s monthly column in Properties Magazine.

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Properties Magazine is a monthly publication dedicated to realty, construction and architecture in Northeast Ohio.

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