9/16/2016

The Good—But Not Great--News of Commercial Real Estate

WASHINGTON, DC—The National Association of Realtors seems pretty optimistic about the state of the industry, citing both a slow but steadily improving labor market and strong demand in multifamily. The group, in its quarterly real estate forecast, is predicting an upward trajectory through the next year.

As we have stated before, we take with grain of salt long-range predictions, but such forecasts also serve as a good indicator of current market conditions, and NAR chief economist Lawrence Yun is frank in his good news/bad news analysis of market conditions. “Ongoing overseas weakness and the slowdown in business investment despite historically low interest rates held second quarter growth at a tepid and disappointing pace,” he says. “Only steady job creation, solid consumer spending and residential construction--albeit not enough of it--kept the economy afloat during the first half of the year.

“Tightening vacancy rates and rising rents are clear positive fundamentals,” he continues, “but commercial real estate property prices have been bid up too high and look to weaken in the upcoming months.”

Vacancies will respond positively to the job gains, but not dramatically, and NAR predicts that office vacancy will dip only 1.5%, to 10.4%, over the next year. Industrial vacancies likewise will shore up only by 0.7%, dipping to 8.7%. And retail vacancies will slip by a mere 1.0% to 10.5%.

Surprisingly, given the stellar performance the multifamily sector has turned in—or maybe because of it--this food group will be posting the only gains in vacancy.But this is clear reflection of demand and the delivery of new housing. Apartment vacancies are expected to creep up from their current market-leading 5.9% to 6.1%.

Outside of multifamily, construction has been more constrained, which had the effect of raising prices on average by 5.3%. “While inventory constraints and strong appreciation in apartment and retail properties pushed up prices in large commercial markets last quarter, overall sales volume was still down as investors looked for better deals and higher yields in smaller cities,” says Yun. “As a result, investments and leasing activity in middle-tier and smaller markets led the way and are expected to maintain their momentum in coming months.”

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