Multifamily and Commercial Real Estate: Tale of Two Sectors

The multifamily sector of the real estate industry is experiencing a recovery, and is poised to register increases in average rents. However, commercial real estate vacancy rates are flat, and lackluster economic growth is likely to keep growth modest.

By Jeffrey Steele, contributing writer

New York—The multifamily sector of the real estate industry is experiencing a healthy recovery, and is poised to register increases in average rents both this year and next. Meantime, commercial real estate vacancy rates are flat, and lackluster economic growth and job creation are likely to keep growth modest for a while.

Those are among highlights of a report issued last week by the National Association of Realtors. NAR chief economist Lawrence Yun noted multifamily is profiting from pent-up demand flowing from the slowdown in household formation in 2008-10. Younger people, who in recent years have bunked with roommates or at their parents’ homes, are moving back into the rental market. The result has been declines in apartment vacancies, and faster rates of rent increases.

Apartment vacancy rates should decline from 5.5 percent this quarter to 4.6 percent in third quarter 2012. Vacancy levels below five percent traditionally are regarded as a landlord’s market. Average apartment rents are expected to climb 2.5 percent in 2011, and 3.2 percent in 2012, Yun said. The markets with the lowest multifamily vacancy rates across the country include Minneapolis with 2.5 percent, New York City with 2.8 percent and Portland, Ore. with 2.9 percent. Multifamily net absorption this year is projected to be about 238,000 units.

The other side of the story isn’t as rosy. A weaker economy is expected to put the brakes on demand for space in the commercial real estate sector, including office, industrial and retail markets. In those markets, vacancy rates range currently range from 12.7 to 16.6 percent. Commercial vacancy rates from third quarter 2011 to third quarter 2012 are expected to decline 0.3 percentage point in the office sector, 0.6 point in industrial real estate and 0.7 point in retail.

The forecast is buttressed by the SIOR Commercial Real Estate Index, an attitudinal survey of market experts by Society of Industrial and Office Realtors (SIOR). About four-fifths of respondents reported office and industrial leasing activity at below historic levels, and seven in 10 reported asking rents less than those one year ago. “It remains a tenant’s market, with many tenants benefiting from moderate concessions and rent discounts,” the NAR report observed, adding in most areas, construction activity is nearly non-existent. In 83 percent of markets, commercial, office and industrial prices are below construction costs.

The SIOR index, which polled 266 local market experts and measured the impact of 10 variables, dropped 2.6 percentage points to 54.9 in the second quarter, and continues to be substantially below the 100 level, which represents a balanced marketplace. The index was last at 100 in third quarter of 2007.