LOS ANGELES — The U.S. commercial real estate market showed continued healthy demand across all property types during the third quarter of 2015, according to CBRE Group Inc.
Demand for the nation’s multifamily units remained strong with the vacancy rate declining 20 basis points from a year earlier, falling to 4.2 percent in the third quarter of 2015. Meanwhile, the office vacancy rate declined 10 basis points from a year ago to 13.4 percent during the third quarter, and has now been flat or has declined for 22 consecutive quarters.
The industrial availability rate continued to decline compared to a year earlier, falling by 20 basis points to 9.6 percent. The industrial availability rate has also been flat or declined for 22 consecutive quarters. The retail availability rate declined 10 basis points to 11.3 percent, 30 basis points below its level a year ago.
“The commercial real estate markets remain near a ‘Goldilocks’ equilibrium, neither too hot nor too cold,” says Jeff Havsy, Americas chief economist for CBRE. “The pace of supply is increasing, but demand remains solid and rent growth is increasing at a sustainable level. Economic fundamentals are pointing to a sustained U.S. office expansion in 2015, with firms continuing to hire workers and office market investment volumes staying high.”
Multifamily Market
Preliminary data shows that apartment demand remained robust in the third quarter with vacancy at 4.2 percent. This is lowest vacancy since the first quarter of 2001, when the rate was 3.9 percent. The decline continues a sustained downward move in the national vacancy rate, a trend that has gained momentum over the past few years.
Compared to a year earlier, vacancy rates declined in 39 of the 62 markets tracked by CBRE, while rising in 18 and staying the same in five. Jacksonville (-150 basis points), Phoenix (-80 basis points) and Fort Worth (-70 basis points) showed the largest year-over-year declines. The tightest markets include those in the greater New York City area, San Francisco and Oakland, Los Angeles, Miami, Boston, Minneapolis, Portland, Detroit, Salt Lake City, San Diego and Nashville.
“The apartment market is expected to continue to tighten through the end of this year and into 2016 amid strong rental demand and solid U.S. economic growth,” says Havsy. “However, high effective rent levels will bring a considerable amount of apartment construction over the next couple years. Demand growth in most markets is strong enough to absorb this activity, but construction activity relative to demand is a potential risk if the global economy slows.”
Office Market
The office vacancy rate has dropped 80 basis points over the past four quarters, reaching its lowest point since the second quarter of 2008. There has been no increase in the national office vacancy rate since the end of Great Recession — 22 consecutive quarters.
Both suburban and downtown markets saw vacancy fall, with the suburban rate dropping by 10 basis points to 15 percent and the downtown rate declining 20 basis points to 10.4 percent. Indianapolis recorded the largest quarterly decline (210 basis points), while Miami, Oakland and San Jose each declined by more than 100 basis points.
Over the past four quarters, markets in California, the Southeast and the Midwest have seen the greatest improvement. Among these improving markets are Jacksonville, Ventura, Indianapolis, San Jose, Detroit, Oakland, Orlando, Nashville and Orange County. The nation’s lowest third-quarter vacancy rates were in San Francisco (6.5 percent), Austin (8.1 percent), Nashville (8.2 percent), Albany (8.4 percent) and New York (8.9 percent).
“The Federal Reserve’s September decision to delay its interest rate hike will help to keep interest rates down, further promoting real estate investment,” says Havsy. “Robust office demand is expected to continue to outpace new supply in the near future, leading to further tightening of the vacancy rate and keeping rent growth above inflation in a majority of U.S. office markets.”
Retail Market
The third-quarter 2015 retail availability rate of 11.3 percent is now 200 basis points below its post-recession peak of 13.3 percent in the second quarter of 2011. Forty of the 62 markets tracked saw availability declines in the third quarter. Louisville, Jacksonville and Philadelphia were among those whose availability rates rose between the second and third quarters. The greatest increases compared to one year ago were in Oklahoma City; Tampa; Wilmington; Del.; San Jose; and Philadelphia.
“Core retail sales have remained above their historical average, with strong sales concentrations in food services and drinking establishments, and the housing-related segments,” says Havsy. “With gasoline cheap, interest rates low and a sturdier labor market, we expect retail spending to continue growing.”
Industrial Market
The third-quarter industrial availability rate of 9.6 percent marked 22 consecutive quarters of flat or declining rates, the longest stretch since CBRE began tracking the national market in 1989. Thirty-nine markets out of 57 industrial markets reported declines during the quarter as demand remained healthy. Significant availability declines included Los Angeles, New York and Philadelphia, each of which fell 40 basis points. Charlotte led the declines with a 140-basis-point drop.
“Fundamental conditions on the demand side continue to be healthy across the industrial markets,” says Havsy. “However, the declines in availability could slow, despite continued strong demand, as more new supply is delivered to the market.”
— Haisten Willis