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Commercial Real Estate

Commercial real estate sector sees improvement

Commercial real estate forecast

According to the National Association of Realtors’ quarterly commercial real estate forecast, all of the major commercial real estate sectors are seeing improved fundamentals, with multifamily housing becoming a landlord’s market, commanding larger rent increases.

Dr. Lawrence Yun, NAR chief economist, noted that vacancy rates are improving in all of the major commercial real estate sectors. “Sustained job creation is benefiting commercial real estate sectors by increasing demand for space. Vacancy rates are steadily falling. Leasing is on the rise and rents are showing signs of strengthening, especially in the apartment market where rents are rising the fastest.”

Vacancy rate projections

NAR forecasts that commercial vacancy rates over the next year will decline 0.4 percentage point in the office sector, 0.8 point in industrial real estate, 0.9 point in the retail sector and 0.2 percentage point in the multifamily rental market.

“Household formation appears to be rising from pent-up demand,” Dr. Yun said. “The tight apartment market should encourage more apartment construction. Otherwise, rent increases could further accelerate in the near-to-intermediate term.”

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The Society of Industrial and Office Realtors (SIOR) shows a notable gain in its SIOR Commercial Real Estate Index, an attitudinal survey of 297 local market experts measuring the impact of 10 variables, jumped 8.3 percentage points to 63.8 in the fourth quarter, following a gain of 0.6 percentage point in the third quarter. The SIOR index remains well below the level of 100 that represents a balanced marketplace, which was last seen in the third quarter of 2007.

Market indicators

Most market indicators improved in the fourth quarter, but 71 percent of respondents said leasing activity is below historic levels in their market and only one in three report there is ample sublease space available.

Construction activity is below normal, according to 95 percent of experts surveyed by SIOR, with 83 percent reporting that it is a buyers’ market for development acquisitions with prices below construction costs in 78 percent of markets. The survey also reveals that two of three experts believe conditions will strengthen this quarter.

Performance by sector

The office and industrial sector is still a tenant’s market as they are still receiving moderate concessions and rent discounts. Vacancy rates in the office sector are projected to fall from 16.4 percent in the current quarter to 16.0 percent in the first quarter of 2013 while industrial vacancy rates are expected to decline from 11.7 percent to 10.9 percent in the same period. Office rents are expected to continue rising with NAR forecasting a 1.9 percent increase in 2012 and 2.4 percent in 2013 while industrial rents are expected to increase 1.8 percent this year and 2.3 percent next.

Retail vacancy rates are forecast to decline from 11.9 percent in the current quarter to 11.0 percent in the first quarter of 2013 with rents expected to increase 0.7 percent this year and 1.2 percent in 2013.

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Notably the strongest sector, multifamily housing is expected to see vacancy rates drop from 4.7 percent in the first quarter to 4.5 percent in the first quarter of 2013. After rising 2.2 percent last year, average apartment rent is expected to increase 3.8 percent in 2012 and another 4.0 percent next year.

Tara Steele is the News Director at The American Genius, covering entrepreneur, real estate, technology news and everything in between. If you'd like to reach Tara with a question, comment, press release or hot news tip, simply click the link below.

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