NAR: Commercial to see mild expansion, easing prices

WASHINGTON – Nov. 30, 2015 – According to the National Association of Realtors® (NAR) commercial real estate forecast for the third quarter, sustained U.S. job growth and improving credit conditions will keep commercial real estate activity expanding into next year. However, property prices will likely cool slightly after reaching their peak in some major markets.

National office vacancy rates will decrease 0.8 percent to 14.8 percent over the coming year as continued job creation drives demand, NAR projects. The industrial space vacancy rate is expected to decline 1.4 percent to 9.7 percent, and retail availability to decrease 1.3 percent to 11.3 percent. With new apartment construction projects coming through the pipeline in several markets, only multifamily vacancies are forecast to increase over the next year – from 6.1 percent to 7.3 percent.

"Temporary turbulence in the financial markets, a stronger U.S. dollar hurting exports and economic weakness overseas chipped away at third quarter growth and led to some deceleration in the pace of commercial investments," says Lawrence Yun, NAR chief economist. "The good news is that these deterrents are slowly receding, which should ultimately reawaken the growing appetite for commercial space heading into next year."

While healthier local labor markets are expected to slowly pull down vacancy rates while pushing rents higher, the modest opening of the credit box is an especially important development for Realtors engaged in deals of $1 million or less because their clients rely heavily on financing from local community banks and credit unions.

Although most Realtors in commercial real estate still report tight lending conditions, an increasing share say that credit is becoming slightly easier to obtain.

Regionally, several states in the South and West outperformed the rest of the country in job growth over the past year. Led by strong demand for apartments from faster household formation and rent growth, metro areas in those states are expected to see elevated levels of new construction, which will lead to a slight uptick in vacancy rates.

"The best days for multifamily housing could be winding down as new construction has already surpassed historical averages," says Yun. "This sector has been the industry's top performer over the past several years as a result of younger households struggling to become homeowners and the demand for apartments far exceeding supply in many markets."

Even though rising occupancy and rents will continue, property prices are forecast to decline slightly in 2016 as the Federal Reserve starts to raise interest rates. With cap rates already compressed to very low levels, Yun anticipates short-term rate increases in December, and then again in March, which could slightly temper market growth. However, investments are still expected to continue on an upward trend.

"Rising sales and investor optimism in recent years has pushed prices past their peak in many of the larger commercial markets," says Yun. "Investors – especially those abroad – looking for better yields will likely seek to invest their larger sums of cash in smaller markets and into lower-end properties."

The latest Realtors Commercial Real Estate Market Survey, which measures quarterly activity from NAR's commercial members, found that the shortage of available inventory remains a concern and is pushing price growth upward. During the third quarter, Realtors' sales volume rose 7.2 percent year-over-year and prices increased 3.8 percent.

NAR's latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets.

© 2015 Florida Realtors®