By Nat Kunes – VP of Product at AppFolio.
During Q3 the National Association of Realtors® (NAR) released its quarterly commercial Real Estate forecast. The analysis measured a variety of economic factors to more accurately predict the upcoming trends in the commercial Real Estate sector. At the time, all signs pointed to a strong labor market and increased household formation patterns; now, the trend continues to remain strong. Commercial Real Estate growth in multiple sub-sectors is expected during the end of 2015 and the beginning of 2016.
Continued Real Estate Growth in Q4
According to the NAR report, “Net absorption rose across the property types, driving rents higher. As employment gains are expected to continue into 2015, demand for commercial space is expected to advance.” This statement is shown to be true across multiple sub-sectors of the commercial Real Estate industry. National office vacancy rates are decreasing. Industrial space vacancies have declined by 0.3 percent, while the retail space begins to go back to its “brick and mortar roots” with a 0.4 percent decrease in vacancies. Throughout the country, new apartment construction has continued to improve as a new generation begins to settle down and create new households.
Expert analysis shows that the growth in local and national economies has contributed to the rise in commercial Real Estate sales. In previous years, numerous offices attempted to reduce costs by cramming employees into small office workspaces. However, as industry giants, namely Google and Facebook, have shown, employee productivity rates can be increased when the office space is more conducive to a collaborative environment. This growing trend has had a trickle-down effect to smaller organizations. Now, we are beginning to see companies leasing larger office spaces in an effort to recruit the best candidates. In growing tech. areas, this trend will help to propel the sale and lease of commercial space in Q4 2015 and Q1 2016.
Job Growth Contributing Factor to Real Estate Growth
According to Lawrence Yun, NAR Chief Economist, job growth and the increasing household formation of young adults has helped to create an increased demand for apartments and multifamily complexes. Throughout several markets, including the Northeast and California, these growth patterns have helped to keep vacancy rates under 4 percent for multifamily housing units. If this sub-sector is going to continue to improve then the completion of multifamily housing units needs to be timed correctly. Currently, there is the potential for a higher-than-anticipated climb if too many multifamily complexes come onto the market to more than meet demand. In this vein, if jobs continue to be added at a reasonable pace to the market, then the multifamily market will continue to remain a solid performer. If, however, the job market takes a decline, then it is expected that this sub-sector will also suffer.
Commercial Growth According to the Numbers
The NAR 2015 Commercial Lending Trends Survey released important figures regarding the growth of four important sub-sectors: office, industrial, retail, and multifamily markets. These numbers are outlined below.
- Office Markets — By Q2 2016, office vacancy rates should decline from 15.6 percent to 15.5 percent. The lowest office vacancy rates are in New York City, Washington D.C., San Francisco, Portland, Oregon, and Little Rock, Arkansas. In 2016 office rents are project to increase by 3.7 percent.
- Industrial Markets — By Q2 2016, industrial vacancy rates are expected to have fallen to 8.1 percent. Orange County, California, Los Angeles, Seattle, Palm Beach, Florida, and Seattle have the lowest industrial vacancy rates. The annual industrial rent is predicted to increase by 3.1 percent in 2016.
- Retail Markets — By Q2 2016, retail vacancy rates are predicted to reduce to 9.2 percent. The lowest retail vacancy rates are in San Francisco, Orange County and San Jose California, Fairfield County, Connecticut, and Long Island, New York. In 2016 the average retail rent is forecasted to increase by 3.1 percent.
- Multifamily Markets — Throughout the Nation, multiple areas are considered “landlord’s markets” with vacancy rates below 5 percent. These markets are primed for higher rent values. The lowest multifamily vacancies are in San Diego, San Bernardino-Riverside, Oakland-East Bay, and Sacramento California, New Haven, Connecticut, Providence, Rhode Island, and Cleveland, Ohio. The average apartment rents are expected to only increase by 3.3 percent in 2016, when compared to the 3.6 percent increase in 2015.
These figures highlight the fact that growth within the commercial Real Estate sector will depend on the continuance of a strong labor market, as well as the increased formation of households amongst young adults. In short, the commercial Real Estate market remains in a “checks and balances” system that relies on a few key factors. In this vein, commercial Realtors must remain cognizant of current and future sale patterns, if they are to successfully capitalize on the current market.