Commercial Property Outlook Boosted By Economic Growth

The strong rebound in economic growth in the United States during the second quarter of this year and ongoing job creation are gradually improving the outlook for all of the major commercial real estate sectors, it is claimed.

According to the latest commercial real estate quarterly forecast from the National Association of Realtors 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.

‘The economy can handle the inevitable rise in interest rates as long as commercial rents steadily rise to generate investor returns,’ said Lawrence Yun, NAR chief economist.

National office vacancy rates are forecast to remain unchanged over the coming year, mostly due to added inventory entering the market. Rising exports and a shrinking trade deficit should lead to a declining vacancy rate for industrial space, while retail space is forecast to decline 0.2% behind favorable gains in personal income and consumer spending.

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

NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyses quarterly data in the office, industrial, retail and multifamily markets.

Office vacancy rates are forecast to remain unchanged at 15.7% through the third quarter of 2015. Currently, the markets with the lowest office vacancy rates in the third quarter are Washington, D.C., at 9.3%, New York City at 9.6%, Little Rock at 11.5%, San Francisco at 12.4% and New Orleans at 12.7%.

Office rents are projected to increase 2.6% in 2014 and 3.2% next year. Net absorption of office space in the US, which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 36.2 million square feet this year and 50.7 million in 2015.

Industrial vacancy rates are expected to fall from 8.9% in the third quarter to 8.5% in the third quarter of 2015. The areas with the lowest industrial vacancy rates currently are Orange County, California with a vacancy rate of 3.5%, Los Angeles at 3.8%, Seattle at 5.9%, Miami at 6.1%, and Palm Beach, Florida at 6.6%.

Annual industrial rents should rise 2.4% this year and 2.8% while net absorption of industrial space nationally is seen at 107.6 million square feet in 2014 and 104.9 million next year.

Vacancy rates in the retail market are expected to decline from 9.8% currently to 9.6% in the third quarter of 2015. Currently, the markets with the lowest retail vacancy rates include San Francisco at 3.5%, Fairfield County at 3.9%, San Jose, California at 4.6%, Long Island, New York, at 5.2% and Orange County, California at 5.3%.

Average retail rents are forecast to rise 2% in 2014 and 2.4% next year. Net absorption of retail space is likely to total 11.2 million square feet this year and 19.3 million in 2015.

The apartment rental market, that is multifamily housing, should see vacancy rates slightly decline from 4.1% currently to 4% in the third quarter of 2015. 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 Orange County, Providence, Rhode Island and Sacramento at 2% and New Haven and Hartford, Connecticut, both at 2.5%.

Average apartment rents are projected to rise 4% this year and in 2015. Multifamily net absorption is expected to total 223,400 units in 2014 and 171,000 next year.

This article was republished with permission from Property Wire.

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