U.S. Commercial Real Estate Maintains Strong Momentum

John Jordan | July 25, 2015

LOS ANGELES, CA—The U.S. commercial real estate market continued to exhibit strong momentum across all property types in the second quarter of 2015, according to the latest analysis from CBRE Group, Inc. released on July 13.

During the second quarter the office vacancy rate dropped 40 basis points to 13.5%, now at its lowest point since Q3 2008 (13.2%).

In Q2 2015, the industrial availability rate dropped 30 basis points to 9.8%—matching the cyclical low achieved in the fourth quarter of 2007.

The retail availability rate dropped 10 basis points, ending the quarter at 11.4%.

Demand for the nation’s apartment buildings continued to grow with vacancy dropping to 4.3% in the second quarter of this year.

“The strong progress in the commercial market matched the continued steady improvement in the economy,” said Jeffrey Havsy, Americas Chief Economist for CBRE. “We remain bullish for the second half of 2015 as economic growth is expected to accelerate after a sluggish start to the year.”

Office Market

The second quarter of 2015 was the 21st consecutive quarter without an increase in office vacancy rates since the end of the Great Recession. The office vacancy rate reached its lowest point since the third quarter of 2008, CBRE reported. Vacancy dropped to 13.5% with a decline of 40 basis points and improvement remained broad-based across the U.S. office markets. The South and West regions saw the greatest improvement over the past four quarters, with notably strong performances in San Jose, Nashville, San Francisco, Richmond, Orange County and Austin. The nation’s lowest vacancy rates in the second quarter of 2015 were in San Francisco (6.7%), Austin (8%), Nashville (8.4%), Pittsburgh (9%) and New York (9.1%).

“The U.S. office market was able to withstand economic headwinds during the first quarter and came back stronger than anticipated in the second quarter,” noted Havsy. “Economic fundamentals are pointing to a sustained U.S. office expansion in 2015, as companies are hiring workers at a robust pace, and investment in commercial real estate continues to show a positive trend.”

Industrial Market

The industrial availability rate dropped 30 basis points from Q1, to 9.8%. The U.S. industrial real estate market has now seen flat or declining availability rates for 21 consecutive quarters, the longest stretch since CBRE began tracking the national market in 1989.

Lower industrial availability rates were widespread in the second quarter of this year. Markets of all sizes and in all regions posted lower availability rates during the quarter, paced by large markets, including Atlanta (-40 basis points), Chicago (-40 basis points), Los Angeles (-50 basis points) and Riverside (-80 basis points).

“The commercial real estate market showed broad based strength in the second quarter with significant declines in industrial vacancy rates,” said Havsy. “The need for new space is greater than it has been in nearly a decade. We expect the economy to continue to grow, aided by many tailwinds benefiting the industrial market including increased consumer spending and e-commerce and the continued resurgence of U.S. manufacturing aided by low energy costs.”

Retail Market

During the second quarter of 2015, the retail availability rate dropped 10 basis points from the prior quarter, and 40 basis points from a year earlier, ending the quarter at 11.4%.  The rate is now 190 basis points below its post-recession peak of 13.3%, representing a slow but ongoing decline. The greatest declines were posted by Louisville (-80 basis points), Seattle (-40 basis points), Salt Lake City (-120 basis points) and Jacksonville (-40 basis points). San Francisco recorded the lowest availability rate in Q2 2015 at 5.4%.

“The retail sector continued its slow and steady progress toward recovery with another 10 basis points drop. A tightening labor market and continued low energy prices are expected to further support U.S. consumers, allowing for increased discretionary spending as the year continues,” said Havsy.

Apartment Market

Preliminary data indicated that apartment demand continued to be strong in the second quarter of 2015, with the multifamily housing vacancy rate declining to 4.3%, a 30 basis points drop from a year earlier. This drop provides further evidence that the rental market continues to tighten along with the expanding U.S. economy. The market is very tight and apartment demand remains strong as the vacancy rate pushes closer to its 20-year vacancy low of 3.1% (Q3 2006).

Compared to a year earlier vacancy rates declined in 43 of the 62 markets, while rising in 15 and staying the same in four. The following markets experienced the greatest year-over-year declines of 80 basis points or more: Salt Lake City, Memphis, Richmond, Jacksonville, Las Vegas, Atlanta, Phoenix, Fort Worth, Orlando and Indianapolis.  Among those posting Q1 vacancy rates of 3.5% or lower were Providence, Newark, Hartford, Salt Lake City, Minneapolis, Miami, San Jose, New York and Sacramento.

With occupancy remaining high by historical standards, effective rent growth is expected to stay strong well into 2015. Although construction places downward pressure on rents, the market is tight enough to absorb this activity.

John Jordan
Editor, Real Estate In-Depth