Health of Commercial Real Estate Broken Down By Sectors

Commercial Real Estate is more diverse than residential real estate. It is broken into sectors and hence each sector can experience different market timing. Here is an overview of the different sectors and how they are performing.

Office Market: According to JLL, “Despite global economic uncertainty, the United States economy continued to expand in 2015 through both employment and output. Innovative economies lead in growth, but a diversity of markets are gaining momentum. Occupancy is growing at a rate 1.3 times faster than new supply, and company expansion into new markets represents nearly 10.0 percent of total leasing activity.

Central Business Districts (CBDs) remain the premier location for many tenants, as reflected in the 12.1 percent vacancy rate. Suburbs and secondary markets like Atlanta, Charlotte, Dallas and Raleigh-Durham are gaining attention though, as both demand and pricing increase.

We expect 2016 to be another year of big numbers as markets prepare to deliver 48.9 million square feet of new supply. This will put upward pressure on rental rates, but provide large tenants with much-needed space for expansions.”

Industrial Market: According to John Gates, “U.S industrial real estate market conditions remain bullish. Vacancy rates this quarter were at a 10-year low of 7 percent. Thirteen of the 50 U.S. markets tracked by JLL reported vacancies under 6 percent, while nine markets, including Seattle, Los Angeles, Denver and Houston were below 5 percent. With these figures we can expect rental growth to outpace the U.S. average in these markets. In fact, national warehouse/distribution center rents were up 5.4 percent from a year ago, while the four aforementioned markets rose 10, 14 and 17.7, respectively. Take-up numbers have been equally as impressive, as total net absorption was up 17 percent year-on-year and has risen each quarter for almost two years.”

Retail: According to Marcus & Millichap, “retailers absorbed nearly 75 million square feet in 2014, eclipsing the nearly 40 million square feet of new space delivered and resulting in a 2.2 percent gain in asking rents.

Dynamic retail conditions carry into 2015 with net absorption of nearly 88 million square feet outpacing still-modest additions to supply. Vacancy is forecast to decline another 60 basis points to 6.0 percent.”

Hospitality: According to Forbes and John Petrovski, “November PwC report forecast RevPAR to increase 8.2 percent in 2014, up from 5.4 percent in 2013. The company also expects 2015 occupancy rates to reach 64.9 percent, the highest level since 1984, and RevPAR to increase 7.4 percent.”

Multifamily: According to Fannie Mae, “National multifamily fundamentals reflected ongoing healthy demand during the fourth quarter of 2015. While there definitely were signs of softening late in the year, this can be attributed to typical year-end seasonality. The preliminary estimated national vacancy level inched up to 5.0 percent from 4.75 percent in the third quarter of 2015. Despite an increase in new apartment construction starting to come online in a number of submarkets across the country, underlying fundamentals have remained steady, supporting demand. Demand Positive but Slowing down Preliminary third-party data for the fourth quarter of 2015 suggest that the vacancy rate for institutional investment-type apartment properties rose to an estimated 5.0 percent, up from an estimated 4.75 percent during the third and second quarters and returning to the estimated 5.0 percent in the year’s first quarter. Estimated rents continued to rise in the fourth quarter, but only by 0.25 percent, the slowest growth of the year compared to 1.25 percent in the third quarter, 1.0 percent in the second quarter, and 0.5 percent in the first. Rents grew at an estimated 3.0 percent in 2015, in line with the Multifamily Economic and Market Research team’s multifamily rent growth forecast of between 3.0 and 3.5 percent.”

As you can see, the immediate future is bright for many of the commercial sectors

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