NAR News Flash: CRE Fundamentals Improving Across The Board

WASHINGTON, D.C. – The National Association of Realtors‘ quarterly forecast shows all commercial sectors are ex-experiencing improved fundamentals, with the multifamily market commanding the largest rent hikes.

“Sustained job creation is benefiting commercial real estate sectors by increasing demand for space,” said Lawrence Yun, chief economist of the D.C.-based NAR. “Vacancy rates are steadily falling. Leasing is on the rise and rents are showing signs of strengthening, especially in the apartment market.”

NAR’s predicted trends have been confirmed by its recent quarterly Commercial Real Estate Market Survey. If the prediction pans out, vacancy rates for the next year will dip 0.4 percent in the office sector; 0.8 percent for industrial; 0.9 percent for retail; and 0.2 percent for multifamily.

Yun credited the multifamily market’s strength to increased household formation due to pent-up demand. “The tight apartment market should encourage more apartment construction,” he said. “Otherwise, rent increases could further accelerate in the near-to-intermediate term.”

Likewise, a notable gain has been recorded by the Society of Industrial and Office Realtors. The SIOR Index, measuring the impact of 10 variables, spiked 8.3 percent to 63.8 percent in the Q4 2011. The previous quarter experienced a 0.6 percent uptick. However, 100 represents a balanced market, which was last seen in Q3 2007.

Seventy-one of the NAR respondents said leasing activity is below historic levels in their markets. Twenty-nine percent report ample sublease space.

The reality is it remains a tenants’ market for office and industrial landlords. Of the respondents, 87 percent said tenants are getting moderate concessions to deep discounts.

Construction remains below normal, according to 95 percent of the survey participants. Meanwhile, 83 percent said it is a buyers’ market for development acquisition, with prices below construction costs in 78 percent of the markets.

Two out of three respondents said they’re expecting stronger conditions for Q1. The forecast uses historic data for metros from REIS Inc.

Highlighting the NAR predictions are:

• Office vacancy will drop to 16 percent from 16.4 percent in Q1 2013. Washington, DC, currently has the lowest rate, 9.5 percent, with New York City in second place at 10 percent and New Orleans, 12.4 percent.
• Office rents will climb 1.9 percent this year and 2.4 percent in 2013, with the U.S.’ net absorption on track to hit 20.1 million this year and 28.1 million next year.
• Industrial vacancy will be 10.9 percent by Q1 2013 versus the current 22.7 percent. The lowest rates are found in Orange County, Calif., 4.8 percent; Los Angeles, 4.9 percent; and Miami, 7.6 percent.
• Industrial rents are expected to tick up 1.8 percent this year and 2.3 percent next year. Net absorption is 40.6 million in 2012 and 57.7 million in 2013.
• Retail vacancy will fall to 11 percent in Q1 2013 from the current 11.9 percent. Cities with the lowest vacancies are San Francisco, 3.6 percent; Fairfield County, Conn., 5.1 percent; and Long Island, NY, 5.4 percent.
• Retail rent, on average, should climb 0.7 percent this year and 1.2 percent next year. Net absorption is expected to be 9.9 million square feet in 2012 and 23.9 million square feet in 2013.
• Multifamily vacancy will be 4.5 percent in Q1 2013; it’s 4.7 percent in this quarter. The lowest rates exist in New York, 1.8 percent; Minneapolis and Portland, Ore., 2.5 percent; and San Jose, Calif., 2.7 percent.
• Multifamily rents are predicted to jump 3.8 percent this year and 4 percent in 2013. Absorption is forecast at 209,900 units in 2012 and 223,600 in 2013.

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