Commercial Real Estate Sectors Steadily Improve

Posted by Heidi Schwartz

Major commercial real estate sectors continue to rebound, albeit slowly, with gradual economic improvement and job creation driving absorption of space, according to the National Association of Realtors® quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, said, “Overall commercial real estate leasing activity continued to grow in most markets during the closing months of 2012, which is modestly lowering vacancy rates in all of the commercial sectors early this year.”

National vacancy rates over the coming year are expected to decline 0.4 percentage point in the office market, 0.4 point in industrial, and 0.3 point for retail.

“Business spending is expected to rise faster in 2013 because of record high corporate profits. Low interest rates also are permitting companies to improve their balance sheets,” Yun said.

NAR’s latest Commercial Real Estate Outlook1 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.,2 a source of commercial real estate performance information.

Office Markets

Vacancy rates in the office sector are forecast to fall from a projected 16% in the first quarter to 15.6% in the first quarter of 2014.

The markets with the lowest office vacancy rates presently (in the first quarter) are Washington, DC, with a vacancy rate of 9.4%; New York City, at 9.6%; and Little Rock, AR, 12.1%.

Office rents should increase 2.6% in 2013 and 2.8% next year, following a 2% gain in 2012. 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 expected to total 34.0 million square feet this year and 42.3 million in 2014.

Industrial Markets

Industrial vacancy rates are likely to decline from 9.6% in the first quarter of this year to 9.2% in the first quarter of 2014.

The areas with the lowest industrial vacancy rates currently are Los Angeles and Orange County, CA, each with a vacancy rate of 3.6%; Miami, 5.6%; and Seattle at 6%.

Annual industrial rents are projected to rise 2.3% this year and 2.6% in 2014, after increasing 1.7% last year. Net absorption of industrial space nationally is likely to total 121.8 million square feet in 2013 and 103.5 million next year.

Retail Markets

Retail vacancy rates are forecast to slide from 10.7% in the first quarter of the year to 10.4% in the first quarter of 2014.

Presently, markets with the lowest retail vacancy rates include San Francisco, 3.5%; Fairfield County, CT at 4.2%; and Orange County, CA, 5.2%.

Average retail rents will probably rise 1.5% in 2013 and 2.1% next year, following a 0.8% gain in 2012. Net absorption of retail space is seen at 11.9 million square feet in 2013 and 16.4 million next year.

The Commercial Real Estate Outlook is published by the NAR Research Division. The NAR commercial community includes commercial members; commercial real estate boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.

1Additional analyses will be posted under Economists’ Outlook in the Research blog section of

2Beginning in the third quarter of 2011, NAR commercial forecasts have been generated based on historical data provided by REIS, Inc., and do not correspond with prior historical information from previous forecasts. This source permits coverage of more metro areas than were previously covered.

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