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Commercial Real Estate Sectors Continue to Improve

FEB 25, 2013 2:55pm ET
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National Association of Realtors data show the overall growth in commercial real estate leasing activity seen in most markets in 2012 will gain speed this year and in 2014.

Gradual economic improvement and job creation that helped absorb vacant CRE space led to continuous improvements across all major sectors early this year, NAR said.

According to NAR chief economist, Lawrence Yun, business spending is expected to rise faster in 2013 as “record high corporate profits” combined with low interest rates “are permitting companies to improve their balance sheets.”

The quarterly NAR Commercial Real Estate Outlook1 for the office, industrial, retail and multifamily markets indicates the national vacancy rates may decline 0.4 percentage points in the office market, 0.4 point in industrial, 0.3 point for retail and 0.1 point in multifamily.

Demand is strong, especially in the multifamily sector, which is experiencing “the tightest availability.” The current supply-demand mismatch has allowed landlords to raise rents at faster rates. However, Yun says, “exceptionally strong” rental housing demand has both driven rent increases and lowered vacancy rates.

The apartment rental market, or multifamily housing, should see vacancy rates ease from 4% in the first quarter to 3.9% in the first quarter of 2014.

And since vacancy rates at below 5% “generally are considered a landlord’s market with demand justifying higher rents,” NAR said, average apartment rents are expected to increase 4.6% in 2012 and 4.7% in 2014, after rising 4.1% in 2012.

The office market is another example. In the first quarter of 2013 it reported very low vacancy rates especially in Washington at 9.4%, New York at 9.6% and Little Rock, Ark., 12.1%.

Hence, NAR changed its vacancy rate forecast from a projected 16% in the first quarter of 2013 to 15.6% in the first quarter of 2014.

Following a 2% gain in 2012 office rents are expected to increase 2.6% in 2013 and 2.8% in 2014.

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 expected to total 34 million square feet in 2012 and 42.3 million square feet in 2014.

Industrial vacancy rates also are likely to decline from 9.6% in the first quarter of this year to 9.2% in the first quarter of 2014.

Retail vacancy rates are forecast to slide from 10.7% in the first quarter of the year to 10.4% in the first quarter of 2014.

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