U.S. Commercial Real Estate Improving, Pace Moderating

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Commercial real estate markets in the U.S. continue to improve but at a slower pace, as companies remain hesitant to add new space, according to the National Association of Realtors. 

"Office demand is expected to see only slow and gradual improvement," Lawrence Yun, NAR chief economist said in the report. "Demand for retail space is benefiting from improved household wealth, while industrial real estate is stable with increasing international trade, which requires warehouse space." 

The apartment market fundamentals are the strongest, as almost all of the new household formation in the past decade has come from renters, and not homeowners, Mr Yun said.

National vacancy rates in the office market in the coming year are forecast to drop from an expected 15.8 percent this quarter to 15.6 percent in the first quarter of 2015. 

Currently, the markets with the lowest office vacancy rates 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 forecast to increase nationwide by 2.3 percent in 2014 and 3.2 percent next year. 

Industrial vacancy rates are expected to drop from 9.0 percent this quarter to 8.9 percent a year from now. 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, NAR reports. 

Nationwide retail vacancy rates are forecast to drop from 10.2 percent to 9.9 percent in the first quarter of 2015. Average rents are expected to increase 2.0 percent in 2014 and 2.3 percent in 2015. Net absorption of retail space is likely to reach 14.6 million square feet in 2014 and grow to 20.9 million in 2015. 

The apartment rental market is forecast to record the strongest gain in rents, growing by 4.3 percent this year and 3.5 percent in 2015. Multifamily net absorption is forecast to total 204,900 apartments in 2014 and 112,500 next year. 

Multifamily vacancy rates should increase from 4.0 percent to 4.1 percent in the first quarter of 2015, as new supply is delivered to meet demand.