Demand for commercial real estate is on a gradual road to recovery, the National Association of Realtors says, thanks to a stronger labor market and growing household formation among young adults.
In its quarterly commercial real estate forecast, the NAR projects national vacancy rates for office space to drop a modest 0.1% over the coming year as demand for office space improves, industrial space to drop 0.3% and retail space to drop 0.4% with increased manufacturing output and consumer spending.
NAR Chief Economist Lawrence Yun said for several quarters commercial rents have been rising moderately and vacancy rates falling gradually, until now.
"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," he said in a May 26 press release. "The exception is multifamily housing, which remains the best performer with vacancy rates under 4% in several markets in the Northeast and in California."
In office markets, the NAR projects vacancy rates will fall modestly from a current 15.6% to 15.5% in the second quarter of 2016; that rents will rise 3.4% this year and 3.7% next year; and that net absorption of office space — new and existing — nationally will total 51.8 million square feet this year and 60 million in 2016.
Little Rock, Ark., and Portland, Ore., had the lowest office vacancy rates in the second quarter at 11.6%, followed by San Francisco at 10.6%, Washington, D.C., at 9% and New York at 8.9%.
In industrial markets, the NAR projects rates will fall from 8.4% in the second quarter to 8.1% the same time next year, that rents will rise 3.1% this year and next, and that net absorption of industrial space will total 108.8 million square feet this year and 104.9 million in 2016.
The markets with the lowest industrial vacancy rates currently are Palm Beach, Fla., at 5.5%, Seattle at 5.4%, Miami at 5.3%, Los Angeles at 3.6% and Orange County, Calif., at 3.4%.
The NAR predicts vacancy rates in the retail market will decline from 9.6% to 9.2% in the second quarter next year, that rents will rise 2.6% this year and 3.1% in 2016, and that net absorption of retail space will total 15.8 million square feet this year and 21.1 million in 2016.
Long Island, N.Y., has the lowest retail vacancy rates right now at 4.9%. Fairfield County, Conn., is also among the lowest at 4.7%, followed by Orange County and San Jose, Calif., at 4.6% and San Francisco at 3%.
However, the hike in multifamily completions coming onto the market has been steeper than anticipated. In multifamily markets, the NAR expects a modest rise in vacancy rates, from 4.3% currently to 4.4% in the second quarter of 2016. Vacancy rates below 5% are generally considered a landlord's market, where demand justifies higher rent.
The NAR expects apartment rents will rise 3.6% this year and then more slowly at 3.3% in 2016; and that net absorption will total 172,524 units in 2015 and 153,747 next year.
Cleveland, Oakland and San Diego hold the lowest multifamily vacancy rates at 2.8%, followed by New Haven, Conn., and Providence, R.I., at 2.7%; Sacramento, Calif., at 2.6% and San Bernardino-Riverside, Calif., at 2.5%.
