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Commercial Real Estate Outlook Positive but Moderating

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commercial_real_estateMarket fundamentals in commercial real estate continue to improve but at a slower pace, according to the National Association of REALTORS® quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, says fundamentals are still on an uptrend. “Growth in commercial real estate sectors continues at a moderate pace from a very slow pace of absorption, despite job additions to the economy. Companies appear hesitant to add new space,” he says.

“Office demand is expected to see only slow and gradual improvement. Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space. Of course, the apartment market fundamentals are the strongest, as nearly all of the new household formation in the past 10 years has come from renters, and not homeowners,” Yun says.

National vacancy rates in the coming year are forecast to decline 0.2 percentage point in the office market, which has the highest level of empty space, 0.1 point in industrial, and 0.3 point for retail real estate. With rising apartment construction, the average multifamily vacancy rate will edge up 0.1 percent, but this sector continues to experience the tightest availability and strongest rent growth of all the commercial sectors.

NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., a source of commercial real estate performance information.

Office Markets
Vacancy rates in the office sector should decline from an expected 15.8 percent in the first quarter of this year to 15.6 percent in the first quarter of 2015.

The markets with the lowest office vacancy rates presently (in the first quarter) are New York City, with a vacancy rate of 9.5 percent; Washington, D.C., at 10.2 percent; Little Rock, Ark., 11.6 percent; Birmingham, Ala., 12.7 percent; and San Francisco and Nashville, Tenn., at 12.8 percent each.

Office rents are projected to increase 2.3 percent in 2014 and 3.2 percent next year. 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 likely to total 44.6 million square feet this year and 50.0 million in 2015.

Industrial Markets
Industrial vacancy rates are anticipated to fall from 9.0 percent in the first quarter to 8.9 percent in the first quarter of 2015.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.7 percent; Los Angeles, 3.8 percent; Miami, 5.8 percent; Seattle at 5.9 percent; and San Riverside/Bernardino, Calif., at 6.1 percent.

Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015. Net absorption of industrial space nationally is seen at 106.1 million square feet in 2014 and 110.6 million next year.

Retail Markets
Retail vacancy rates are expected to decline from 10.2 percent in the first quarter of this year to 9.9 percent in the first quarter of 2015.

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