U.S. Office Market Posts Best Performance Since 2007

---

Commercial Market Turned Healthy Again in 2014

According to CBRE Group, the U.S. commercial real estate market showed continued health across all property types in the fourth quarter of 2014.
 
The office vacancy rate declined by 20 basis points (bps) from the previous quarter to reach 13.9% in Q4 2014 and ended the year 100 bps lower than 2013. The 2014 office market's performance was the best since 2007.
 
"The commercial real estate market continues its broad-based, steady improvement," said Jeffrey Havsy, Americas Chief Economist for CBRE. "Vacancy rates are still above pre-crisis troughs, but they are at or below the long-term averages. Continued economic growth combined with muted supply, should lead vacancy rates to fall even further in 2015."
 

• In Q4 2014, national industrial availability declined 30 bps from the previous quarter to 10.3%.

• Retail demand continued to strengthen, with availability at 11.4% in Q4 2014, a 10 bps decrease from the previous quarter. 

 
U.S. Office Market

With a 20 bps decrease for Q4 2014, the office market has now seen ten consecutive quarters of lower or stable vacancy. Absorption of office space in the quarter was more than 15 million sq. ft. Vacancy improvements were broad-based with 48 of the 63 U.S. office markets showing vacancy declines in Q4 2014. Downtown markets continue to perform well, with their vacancy rate declining by 20 bps, to reach 11.1% while the suburban vacancy rate, which has been falling for the past five years, dropped another 20 bps this quarter, to 15.5%.
 
Nashville's 150 bps decline to 9.0% was the quarter's best performance; Ventura (-120 bps), Salt Lake City (-110 bps) and St. Louis (-110 bps) followed. As of year-end 2014, San Francisco has the lowest vacancy rate in the nation (7.3%), followed by Austin (8.1%), New York (8.6%), Nashville (9%), and Albany and Pittsburgh (9.4%).
 
"Although the national office vacancy drop of 100 bps in 2014 was impressive, vacancy remained above the pre-recessionary low of 12.5%," noted Mr. Havsy."We do expect office space demand to remain strong during 2015, fueled by healthy expansion, low inflation, and the internal stability of the U.S. economy. These factors will continue to attract capital investment to the U.S. market. One concern is that the strong dollar could be a headwind for U.S. economic growth."
 
Industrial Market

With the availability rate decline to 10.3% in Q4 2014, the industrial market's recovery has now stretched to 18 consecutive quarters. The current availability rate is 420 bps below the 2009 peak level and down 100 bps compared to 2013. Q4 2014 industrial absorption totaled 64 million sq. ft. A majority of markets improved during Q3 2014, with 44 reporting declines in availability while four remained unchanged and 13 recorded increases.
 
Lower rates were widespread. Ten markets fell 50 bps or more, showing that there is still plenty of slack in some markets. Detroit continues to be a strong performer falling 70 bps during the quarter to its lowest availability level since early 2001. Atlanta (-70 bps) and Houston (-60 bps) were the other large markets with the most significant declines. Riverside, one of the most-watched industrial markets, fell 50 bps, continuing a decline that had appeared to level off for the past two quarters.
 
"The industrial market continues to be a bright spot in the widespread economic recovery taking place here in the U.S.," commented Mr. Havsy. "Many aspects of the recovery that directly affect demand for industrial real estate, such as GDP and manufacturing sector expansion, have continued to show strength in recent quarters and we expect strong performance to continue as conditions remain ripe for further growth."
 
Retail Market

The retail market recovery continued with Q4 2014's retail availability rate of 11.4% now 180 bps below the post-recession peak of 13.2%.
 
Approximately half of the markets recorded availability decline in Q4 2014 compared with the previous quarter; 32 recorded flat or increasing rates. Dallas, Kansas City and Riverside were among those that recorded rising availability rates in Q4 2014; however 50 of the 63 markets have improved upon their rates of one year ago. The greatest changes compared to one year ago were in Jacksonville, Louisville, Tampa and Seattle. Markets that recorded availability rate declines of 50 bps or more in Q4 2014 included San Francisco, Albuquerque and Portland.
 
Core retail sales growth continued to improve in the first two months of the fourth quarter; in October and November, year-over-year growth registered 4.6% and 5.2%, respectively. Core retail sales growth has remained above its historical average rate, and has been concentrated in housing-related retail sales. This trend is expected to continue as the housing situation improves and other positive trends, such as cheap energy and low interest rates, allow for increased discretionary spending.