Despite Overseas Concerns, U.S. Commercial Market Stable in 2015

---

According to the National Association of Realtors (NAR) latest quarterly Commercial Real Estate Outlook, despite a slowing global economy, forward economic momentum in the U.S. should keep commercial real estate activity on firmer footing in 2015.
 
Lawrence Yun, NAR chief economist, says commercial activity should progress at a gradual pace heading into 2015. "Solid economic growth in the third quarter proved that the second quarter wasn't an anomaly, as business spending increased, commercial construction rose and the labor market continued to make positive strides," he said. "Job growth is the catalyst to improved demand for commercial real estate leasing and new construction projects."
 
However, Yun does caution that softening in the global economy will likely widen the trade deficit in the U.S. and could trigger some weakening in the overall economy. "GDP growth in the fourth quarter will be sluggish at around 2 percent behind stalling exports. Although GDP will likely climb to near 3 percent in 2015, the current pace of job growth could slow and ultimately impact commercial real estate activity if sluggishness in the global economy persists," he said.
 
National office vacancy rates are forecast to decrease 0.5 percent over the coming year due to job growth exceeding inventory coming onto the market. Improved manufacturing activity should lead to a declining vacancy rate for industrial space (0.4 percent), while retail space is forecast to decline 0.2 percent behind a boost in consumer spending from personal income gains and lower gas prices.
 
"Low housing inventory and the sizeable demand for rentals will continue to spur multifamily construction as well as keep rents rising above inflation through next year," says Yun.
 
U.S. Office Markets
 
Office vacancy rates are forecast to slightly decline from 15.7 percent in the fourth quarter to 15.6 percent through the fourth quarter of 2015.
 
The markets with the lowest office vacancy rates in the fourth quarter are Washington, D.C., at 9.3 percent; New York City, 9.6 percent; Little Rock, Ark., 11.6 percent; San Francisco, 12.2 percent; and Seattle, at 12.8 percent.           
 
Office rents are projected to increase 2.4 percent in 2014 and 3.3 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 35.6 million square feet this year and 48.8 million in 2015.
 
Industrial Markets
 
Industrial vacancy rates are expected to fall from 8.8 percent in the fourth quarter to 8.4 percent in the fourth quarter of 2015.
 
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.6 percent; Los Angeles, 3.7 percent; Seattle, 5.8 percent; Miami, 6.0; and Palm Beach, Fla., at 6.5 percent.
 
Annual industrial rents should rise 2.4 percent this year and 2.9 percent in 2015. Net absorption of industrial space nationally is expected to total 110.7 million square feet in 2014 and 102.5 million square feet next year.
 
Retail Markets
 
Vacancy rates in the retail market are expected to decline from 9.7 percent currently to 9.5 percent in the fourth quarter of 2015.
 
Currently, the markets with the lowest retail vacancy rates include San Francisco, at 3.5 percent; Fairfield County, Conn., 3.9 percent; San Jose, Calif., 4.6 percent; Orange County, Calif., 5.2 percent; and Long Island, N.Y., at 5.3 percent.
 
Average retail rents are forecast to rise 2.0 percent in 2014 and 2.5 percent next year. Net absorption of retail space is likely to total 11.4 million square feet this year and jump to 18.9 million in 2015.
 
Multifamily Markets
 
The apartment rental market - multifamily housing - should see vacancy rates slightly increase from 4.0 percent currently to 4.3 percent in the fourth quarter of 2015. Vacancy rates below 5 percent are generally considered a landlord's market, with demand justifying higher rent.
 
Areas with the lowest multifamily vacancy rates currently are Orange County, Calif., and Sacramento, Calif., at 2.2 percent; Providence, R.I., and New Haven, Conn., at 2.3 percent; and Hartford, Conn., at 2.5 percent.
 
Average apartment rents are projected to rise 4.0 this year and 4.1 percent in 2015. Multifamily net absorption is expected to total 216,300 units in 2014 and 171,200 next year.