Auction.com: Improving Commercial Markets for Rest of 2013

As the first quarter of the year comes to an end, Auction.com Research is forecasting cautious optimism for commercial real estate markets for 2013 and beyond.

In its quarterly economic and real estate update, the Irvine, Calif.-based division of Auction.com provided an overview of the domestic economy and capital markets for office, retail, multifamily and warehouse sectors.

For offices, the recovery has been slow as demand remains unlively and supply additions have been modest, the report noted. Peter Muoio, head of Auction.com Research who authored this report, said office absorption was positive for the eighth consecutive quarter through the end of 2012, measuring 3.9 million square feet.

The report predicts that demand will gain traction over the next several years, while supply will remain modest. As vacancies start to fall, Muoio said rent growth will gain traction, which is expected to jump by 2.6% per year.

Secondly, the report emphasizes that the retail market is stalled and fundamentals were at their lowest level when 2012 ended. Muoio stated the reason for this is that retailers “remain cautious as to the strength and continuity of the economic recovery.”

But he added that retail is “poised to build on the modest gains generated in 2012,” which doubled from the prior year. Auction.com Research expects absorption to continue gaining momentum, but at the same time, supply is expected to increase, therefore limiting the vacancy improvement.

Through the end of 2012, the multifamily sector also showed strong absorption, but this is predicted to level off in the coming years. The report cited the transition from ownership as the reason for this expectant slowdown, but Auction.com Research thinks it will remain “solid thanks to declines in youth unemployment.”

Furthermore, the multifamily segment is facing a growing supply pipeline, as the rapid recovery in fundamentals has driven development. Auction.com Research said that while increased household formations will support absorption, strong rent growth will spur more development. For example, Muoio predicted vacancies will reach a trough of 3.7% in 2015 before rising 20 basis points the following year. Also, robust rents will continue through this time period too, he added.

Lastly, the warehouse market has seen a stronger vacancy recovery than the office and retail segments, though not as robust as the multifamily market. In 2012, industrial absorption measured over 96 million square feet, according to the report. Also, vacancies reached a low enough level to drive a 1.7% increase in rent growth.

Muoio said he expects absorption to taper off slightly in the coming years as supply additions remain around 2012’s pace through 2014, before improvement in fundamentals spur development after this time. Additionally, rents warehouse rents will increase through 2016 as vacancies continue to fall.

“The U.S. economy ended 2012 in the doldrums but started off 2013 on a more positive note,” said Peter Muoio, head of Auction.com Research. “Employment, household net worth, retail sales and business indicators are up and uncertainty has receded. Nevertheless, risks remain, with the potential impact of tax increases and federal spending cuts still uncertain.”