All Commercial Real Estate Sectors in U.S. Improving with Multifamily Leading the Way, Says NAR Report

---

According to the National Association of Realtors (NAR) new quarterly commercial real estate forecast, despite prolonged impact from the recession, fundamentals are gradually improving in all of the major commercial real estate sectors. The apartment rental sector has fully recovered and is growing.

The findings also are confirmed in NAR's recent quarterly Commercial Real Estate Market Survey, which collects data from members about market activity.

Lawrence Yun, NAR chief economist, said new jobs are the key.  "Ongoing job creation, which is at a higher level this year, is fueling an underlying demand for commercial real estate space, assisted by a steady increase in consumer spending," he said.  "The pattern shows gradually declining commercial vacancy rates, with consequential but generally modest rent growth."

Yun expects the economy to add 2 to 2.5 million jobs both this year and in 2013, on the heels of 1.7 million new jobs in 2011, assuming a new federal budget is passed before the end of the year.  "Although we need even stronger job growth, by far the greatest impact of job creation is in multifamily housing, where newly formed households striking out on their own have increased demand for apartment rentals - this is the sector with the lowest vacancy rates and strongest rent growth, which is attracting many investors."

Rising apartment rents also are having a positive impact on home sales because many long-time renters now view homeownership as a better long-term option, Yun noted.

A large problem remains for purchases of commercial property priced under $2.5 million.  "Our recent commercial lending survey shows that there is very little capital available for small business, which is significantly impacting commercial real estate transactions, although funding is less restrictive for bigger properties."

NAR's latest Commercial Real Estate Outlook  offers 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 are projected to fall from 16.3 percent in the second quarter of this year to 16.0 percent in the second quarter of 2013.

The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.3 percent; New York City, at 10.0 percent; and New Orleans, 12.6 percent.

Office rents should increase 2.0 percent this year and 2.5 percent in 2013.  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 forecast at 24.7 million square feet in 2012 and 48.0 million next year.

Industrial Markets

Industrial vacancy rates are likely to decline from 11.0 percent in the current quarter to 10.7 percent in the second quarter of 2013.

The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.7 percent; Los Angeles, 5.0 percent; and Miami at 7.2 percent.

Annual industrial rent is expected to rise 1.6 percent in 2012 and 2.4 percent next year.  Net absorption of industrial space nationally is seen at 44.1 million square feet this year and 62.4 million in 2013.

Retail Markets

Retail vacancy rates are forecast to decline from 11.3 percent in the second quarter to 10.7 percent in the second quarter of 2013.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.7 percent; Fairfield County, Conn., at 4.0 percent; and Long Island, N.Y., at 5.0 percent.

Average retail rent should rise 0.8 percent this year and 1.3 percent in 2013.  Net absorption of retail space is projected at 8.0 million square feet this year and 21.9 million in 2013.

Multifamily Markets

The apartment rental market - multifamily housing - is likely to see vacancy rates drop from 4.5 percent in the second quarter to 4.3 percent in the second quarter of 2013; apartment vacancy rates below 5 percent generally are considered a landlord's market with demand justifying higher rents.

Areas with the lowest multifamily vacancy rates currently are New York City, 2.1 percent; Portland, Ore., at 2.3 percent; and Minneapolis at 2.4 percent.

After rising 2.2 percent last year, average apartment rent is expected to increase 4.0 percent in 2012 and another 4.1 percent next year.  "Such a rent increase will raise the core consumer inflation rate.  The Federal Reserve, in turn, may be forced to raise interest rates, possibly as early as late 2013."

Multifamily net absorption is forecast at 215,900 units this year and 230,300 in 2013.