Economy Watch: Charting CRE’s Course

A strong labor market and rising household formations look good for CRE. Can this trend continue?

By Dees Stribling, Contributing Editor

Generally known for its housing data, the National Association of Realtors also produces a commercial real estate forecast for the United States on a quarterly basis. The latest of them, which came out this week, asserts that that a stronger labor market and rising household formation ought to keep the wind in CRE’s sails, though only moderately. For instance, the report predicts that nationwide—which involves the averaging of a lot of markets—office vacancies will drop by 0.1 percent over the course of the next 12 months. Not much of an improvement, but better than nothing: a decline from 15.6 percent in the second quarter of this year to 15.5 percent in Q2 2016.

The markets with the lowest office vacancy rates in the current quarter are New York City, at 8.9 percent; Washington, D.C., at 9 percent; San Francisco, at 10.6 percent; and Little Rock, Ark., and Portland, Ore. at 11.6 percent. A mixed bag, in other words, with New York and Washington’s strong markets perhaps a bit easier to explain than Little Rock’s. NAR also predicts that office rents will increase 3.4 percent this year and 3.7 percent in 2016. Net absorption of office space, which includes the leasing of new space coming on the market as well as existing properties, is likely to total 51.8 million square feet this year and 60 million square feet in 2016.

The nation’s industrial properties markets are expected to do a little better, NAR predicted, with vacancy rates falling from 8.4 percent in Q2 2015 to 8.1 percent in the second quarter of 2016. The areas with the lowest current industrial vacancy rates are Orange County, Calif., with a rate of 3.4 percent; Los Angeles, at 3.6 percent; Miami, at 5.3 percent; Seattle, at 5.4 percent; and Palm Beach, Fla., at 5.5 percent. For the most part, these are major transshipment markets still unfazed by the strong dollar or (in the case of the West Coast, the improved Panama Canal). Annual industrial rents should rise 3.1 percent both this year and in 2016, the organization predicted. Net absorption of industrial space nationally is expected to total 108.8 million square feet in 2015 and 104.9 million square feet next year.

Even retail, so hard hit by the recession and online competition, ought to do better in the coming 12 months, the Realtors think. Vacancy rates are expected to decline from 9.6 percent to 9.2 percent by Q2 2016. Currently the markets with the lowest retail vacancy rates include San Francisco, at 3 percent; Orange County, Calif., and San Jose, Calif., at 4.6 percent; Fairfield County, Conn., at 4.7 percent; and Long Island, NY, at 4.9 percent. Average retail rents are forecast to rise 2.6 percent this year and 3.1 percent in 2016, with net absorption likely to total 15.8 million square feet this year and jump to 21.1 million in 2016.

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