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Commercial Real Estate Market Outlook: Vacancy Rates Expected to Decline

Written by Paul Esajian

As a testament to the housing sector, commercial real estate markets have seen a decline in vacancy rates. Perhaps even more significantly, however, is the modest rent growth that has occurred in the same time-frame. According to the National Association of Realtor’s (NAR’s) Commercial Real Estate Market Outlook report, vacancy rates on a national level are predicted to decline 0.2 percent in the office market, 0.6 percent in the industrial market and 0.6 percent in the retail market.

“Office vacancies haven’t declined much because total jobs today are still below that of the pre-recession level in 2007, but rising international trade is boosting demand for warehouse space,” Lawrence Yun, NAR chief economist. “Consumer spending has been favorable for the retail market, and rising construction is keeping apartment availability fairly even, though at low vacancy levels. That, in turn, is pushing apartment rents to rise twice as fast as broad consumer prices and average wage growth.”

Conversely, the vacancy rate associated with multifamily housing is not likely to experience any significant changes. Stagnation demonstrated by the multifamily housing sector is directly correlated to tight inventory levels and large rent increases.

According to the latest Commercial Real Estate Market Outlook report, vacancy rates in the office sector are expected to decline from a projected 15.7 percent in the third quarter to 15.5 percent a year from now. The following office markets currently demonstrate the lowest vacancy rates on a national level:

  • Washington, D.C. (9.7% vacancy rate)
  • New York City (9.8% vacancy rate)
  • Little Rock (12.1% vacancy rate)
  • Birmingham (12.4% vacancy rate)

Similarly, industrial markets are expected to experience a similar decline in vacancy rates. The NAR’s quarterly report has acknowledged the potential for a 9.3 percent decrease. Areas with the lowest industrial vacancy rates are as follows:

  • Orange County, CA (3.8% vacancy rate)
  • Los Angeles (4% vacancy rate)
  • Miami (5.9% vacancy rate)
  • Seattle (6.4% vacancy rate)

In association with industrial and commercial markets, the retail market is expected to drop to 10 percent in the third quarter of next year. The following retail markets are currently the beneficiaries of the lowest vacancy rates:

  • San Francisco (3.9% vacancy rate)
  • Fairfield County, CT (4.1% vacancy rate)
  • Long Island N.Y. (5% vacancy rate)
  • Orange County, CA (5.5% vacancy rate)

The quarterly report proceeded to acknowledge multifamily markets as the sole recipient of a vacancy increase. Multifamily housing, otherwise known as the apartment rental sector, is likely to experience a 0.1 percent increase by this time next year. The 0.1 percent increase will level the vacancy rate off at an even 4 percent. Generally, vacancy rates below 5 percent are considered a landlord’s market where demand justifies higher rent. Areas with the lowest multifamily vacancy rates include:

  • New Haven, CT (1.9% vacancy rate)
  • Syracuse, N.Y. (2% vacancy rate)
  • New York City & San Diego (2.1% vacancy rate)
  • Minneapolis (2.2% vacancy rate)