Network with Industry peers from Meadowlands, Bergen and Passaic Counties as you discuss the future of the local commercial market at this business-after-hours cocktail reception. Chief Economist Dr. Lawrence Yun of the National Association of REALTORS, will present the economic forecast, outlook and trends for commercial real estate in 2015. Immediately following Dr. Yun will be a local expert panel of commercial real estate professionals to provide local market insight.
Dr. Yun creates NAR’s forecasts and participates in many economic forecasting panels, among them Blue Chip and the Harvard University Industrial Economist Council. He oversees and is responsible for a wide range of research activity for the association including NAR’s Existing Home Sales statistics, Affordability Index, and Home Buyers and Sellers Profile Report.
USA Today in 2008 listed him among the top 10 economic forecasters in the country and he has been named among the Most Influential Real Estate Leaders by INMAN News over the past several years.
Dr. Yun received his undergraduate degree from Purdue University and earned his Ph.D. from the University of Maryland at College Park.
The NAR Commercial Forecast is out, and the news is good. With multifamily leading the pack, all sectors of commercial real estate have seen improvement in growth, lending and starts. The NAR news release reads:
The outlook for all of the major commercial real estate sectors is slightly improving despite disappointing economic growth during the first quarter of 2014, according to the National Association of Realtors® quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, said the sluggish growth experienced in the first quarter is not indicative of the actual health of the economy. “Gross Domestic Product should expand closer to 3 percent for the remainder of the year. The improved lending for commercial loans and continuing job gains we’ve seen this spring bode well for modest progress in commercial real estate leases and purchases of properties.”
However, Yun cautions that with rising long-term interest rates on the horizon, consistent economic growth is imperative to solid commercial real estate investment in the years ahead.
National vacancy rates in the office market are forecast to decline 0.2 percentage point over the coming year, while international trade gains continue to boost use for industrial space, which forecasts a decline of 0.3 point. The outlook for personal income and consumer spending is favorable for the retail market, likely leading to a vacancy decline of 0.2 percent.
“The multifamily sector continues to be the top-performer in commercial real estate with the lowest vacancy rates. However, tight availability – despite new construction – is causing rents to currently rise near 4 percent annually in many markets,” said Yun. “Many renters who are getting squeezed may begin to view homeownership as a more favorable, long-term option.”
NAR reported earlier this month in its annual Commercial Member Profile that despite subpar economic expansion, Realtors® who practice commercial real estate saw an increase in sales transaction volume and medium gross annual income in 2013.
NAR’s latest Commercial Real Estate Outlook1 offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS Inc., a source of commercial real estate performance information.
Office vacancy rates should decline from an expected 15.8 percent in the second quarter of this year to 15.6 percent in the second quarter of 2015.
Currently, the markets with the lowest office vacancy rates in the second quarter are New York City and Washington, D.C., at 9.4 percent; Little Rock, Ark., 11.5 percent; San Francisco, 12.6 percent; and New Orleans, at 12.8 percent.
Office rents are projected to increase 2.5 percent in 2014 and 3.2 percent next year. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is likely to total 39.7 million square feet this year and 49.8 million in 2015.
Industrial vacancy rates are anticipated to fall from 9.0 percent in the second quarter to 8.7 percent in the second quarter of 2015.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 3.5 percent; Los Angeles, 3.9 percent; Miami and Seattle, 6.0 percent, and Palm Beach, Fla., at 6.5 percent.
Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015. Net absorption of industrial space nationally is seen at 107.8 million square feet in 2014 and 107.1 million next year.
Vacancy rates in the retail market are expected to decline from 10.0 percent currently to 9.8 percent in the second quarter of 2015.
Presently, markets with the lowest retail vacancy rates include San Francisco, at 3.2 percent; Fairfield County, Conn., 3.8 percent; and San Jose, Calif., at 4.7 percent. Northern New Jersey; Long Island, N.Y.; and Orange County, Calif., all have a vacancy rate of 5.3 percent.
Average retail rents are forecast to rise 2.0 percent in 2014 and 2.3 percent next year. Net absorption of retail space is likely to total 11.5 million square feet this year and 19.6 million in 2015.
The apartment rental market – multifamily housing – should see vacancy rates edge up from 4.0 percent in the second quarter to 4.1 percent in the second quarter of 2015, with added supply helping to meet growing demand. Vacancy rates below 5 percent are generally considered a landlord’s market, with demand justifying higher rent.
Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.3 percent; Ventura County, Calif., 2.4 percent; and New York City; San Diego; Hartford, Conn.; Oakland-East Bay, Calif., and San Diego, at 2.5 percent each.
Average apartment rents are projected to rise 4.0 this year and in 2015. Multifamily net absorption is expected to total 221,400 units in 2014 and 173,100 next year.
The Commercial Real Estate Outlook is published by the NAR Research Division. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
The NAR commercial community includes commercial members; commercial real estate boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 70,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 283,000 members offer commercial real estate services as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1million members involved in all aspects of the residential and commercial real estate industries.
Declining national vacancy rates dominate the latest commercial real estate market forecast by NAR’s Chief Economist Lawrence Yun, who sees a range of positive indicators in all the latest data that nonetheless can’t quite reach pre-crisis optimism.
“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,” said Yun. “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.”
Industrial: vacancy down, rents up
Yun expects industrial vacancy rates to fall from 9.3 percent in the third quarter of this year to 8.7 percent in the third quarter of 2014.
The country’s lowest industrial vacancy rates today? Orange County, CA (3.8%) ; Los Angeles, (4.0%); Miami, (5.9%); and Seattle (6.4%).
Annual industrial rents are expected to rise 2.4 percent this year and 2.6 percent in 2014. Net absorption of industrial space nationally is anticipated at 102.0 million square feet in 2013 and 105.8 million next year.
Office Markets: vacancies and rents projected flatter but better
Vacancy rates in the office sector are expected to decline from a projected 15.7 percent in 3Q to 15.5 percent in the third quarter of 2014.
The markets with the lowest office vacancy rates presently (in the third quarter) are Washington, D.C., with a vacancy rate of 9.7 percent; New York City, at 9.8 percent; Little Rock, Ark., 12.1 percent; and Birmingham, Ala., 12.4 percent.
Office rents should increase 2.5 percent this year and 2.8 percent in 2014. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is seen at 30.1 million square feet this year and 41.6 million in 2014. Retail: national absorption looking healthy
Retail vacancy rates are forecast to decline from 10.6 percent in the third quarter of this year to 10.0 percent in the third quarter of 2014.
Presently, markets with the lowest retail vacancy rates include San Francisco, 3.9 percent; Fairfield County, Conn., at 4.1 percent; Long Island, N.Y., 5.0 percent; and Orange County, Calif., at 5.5 percent.
Average retail rents should increase 1.5 percent in 2013 and 2.3 percent next year. Net absorption of retail space is projected at 11.8 million square feet in 2013 and 18.2 million next year.
Multifamily: Flat vacancies, solid bump in rents
The apartment rental market – multifamily housing – is likely to see vacancy rates edge up only 0.1 percentage point from 3.9 percent in the third quarter to 4.0 percent in the third quarter of 2014, with construction rising to meet increased demand. Generally, vacancy rates below 5 percent are considered a landlord’s market where demand justifies higher rent.
Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 1.9 percent; Syracuse, N.Y., 2.0 percent; New York City and San Diego, at 2.1 percent each; and Minneapolis, 2.2 percent.
Average apartment rents are forecast to rise 4.0 percent this year and another 4.0 percent in 2014. Multifamily net absorption is projected to total 266,700 units in 2013 and 259,800 next year.
If there’s a phrase of the week in commercial real estate — and seemingly everywhere else — it has to be “fiscal cliff.” In previous months, you might have bumped into this term here or there as part of the presidential election seasonal background. But in conversation at NAR Conference & Expo 2012, “fiscal cliff” is a constant refrain, something you will hear several times a day, if not per hour. It’s on morning television (I counted five uses in around 20 minutes on the Today Show), it’s on the convention floor, and it’s in the national dialogue. If you used “fiscal cliff” as a drinking game (morning rules: coffee only) you’d be wired and climbing the walls inside of an hour.
So I found it to be something of a surprise when NAR Chief Economist Lawrence Yun took the stage to lead the Economic Issues & Commercial Real Estate Business Trends Forum, because while he did glancingly refer to the FC, the most eye-popping slide he presented wasn’t about a cliff, but about a chokepoint.
The enduring “cliff” is about the narrative of how government expenses are outpacing its ability to pay for what it does. But there’s a serious case to make that a broadened tax base, where employment is high and the corporate spending that drives employment is also high, is a giant part of what is missing. Without corporate spending, the tax base doesn’t grow and, well, fiscal cliff ahoy.
With worker productivity up at record levels and tax rates on corporate coffers among the lowest in the western world, “corporate profits are sky-high, but they have reduced their spending,” said Yun, throwing up a slide indicating the boardrooms of the country are indeed flush with the very green stuff we could all use to avoid the dreaded fiscal cliff. But they’re not spending. “If businesses used the cash, it would speed recovery,” he continued.
Which means to me, we have the wrong buzzword this week. Why not replace “fiscal cliff” with “corporate chokehold”? Is it because it’s easier to beat up on Washington when we feel it so often beats up on business?
Some further highlights’ of Lawrence’s presentation:
World Trade Continuing To Double
Promising good things for the industrial/warehousing sector, Yun added that world trade continues to double every ten years. More trade means more shipping, which means more rail and intermodal traffic, which means more goods and more logistics structures to distribute them. The business of moving stuff around remains a growth industry and benefits the industrial sector.
The Fiscal Cliff
“I don’t think it will happen,” said Yun.
Dodd-Frank / Size Matters
There’s beating up on government regulation, and then there’s just reporting about workflow. The Dodd-Frank legislation has produced a nearly 10,000 page set of regulations, the sheer size of which is benefiting the largest banks and kicking the smaller ones out of compliance and therefore lines of business. Why? JPMChase has a legal department employing scores of attorneys and is therefore in a position to digest Dodd-Frank. Your local bank might have one lawyer to deal with 9,000+ pages of regulation.
And the 2012 REALTORS® Conference & Expo in Orlando is underway!
It’s an electric atmosphere, at the Expo, and unofficially I can report it looks like a bit of an attendance hike over last year’s Expo from what I can tell just walking the corridors. REALTORS® from all over the country are meeting and greeting, networking and sharing war stories like always, but this time around, there’s a palpable feeling of market renewal and recovery. Either that, or the Florida sunshine has already done its magic en masse.
Today’s commercial real estate program offerings from NAR Commerical have already ranged from a deep dive into making the transition into commercial practice from residential practice to a rundown of the economy and profile of this year’s market for agricultural land. Afternoon sessions include Economic Issues & Commercial Real Estate Business Trends Forum with NAR Chief Economist Lawrence Yun, who, sunshine or no, will certainly be able to pick apart the numbers for the year and the trends for the coming year.
NAR’s Chief Economist and Senior VP of Research Lawrence Yun notes the National Credit Union Association’s piece suggesting that credit unions are trying to pick up the slack left by our pinstriped friends the banks in the commercial credit market:
Commercial real estate loans are very difficult to obtain. The lack of government backing (outside of multifamily mortgages) and a higher capital charge on office, retail, industrial, and other commercial real estate-related mortgages have severely hindered credit flow and potential business deals. Moreover, the compliance costs related to the Dodd-Frank bill and the uncertainty regarding Basel III rules are said to be too burdensome for smaller independent community banks from lending on modest-sized loans. Large banks have enough legal staff to handle the compliance, but small banks do not.
A survey of REALTORS® who specialize in commercial real estate showed that many traditionally have relied on small local lenders. Furthermore, most deals were in the amount of less than $1 million. In other words, REALTORS® who specialize in commercial real estate were predominately helping local small businesses start a new business by getting that lease or purchasing a building. But with commercial credit barely flowing from traditional sources of small independent community banks, REALTORS® and clients were forced to turn to the big banks and the accompanying bureaucracy. The big banks, partly as a result, are getting bigger while smaller-sized banks are getting squeezed, which should not be viewed as a healthy development for competition and customer care.
But one recent sparkling spot among smaller-sized lenders is that credit unions have begun to provide more loans. NAR had actively pushed for raising the amount the credit unions would be permitted to lend on commercial real estate. The latest data from the National Credit Union Administration showed the total loan amount rising to $582 billion, at an annualized rate of 3.6 percent, the largest single quarter increase in four years. Given some anecdotal stories of commercial REALTOR® members having a better chance of securing a loan from credit unions, those who had been shut out from traditional lenders should at least inquire with credit unions.
While underlying fundamentals remain positive and continue to support all commercial real estate sectors, ongoing tight loan availability and a slowdown in job creation has softened growth in some areas, says the NAR quarterly commercial real estate forecast.
Exports and jobs
NAR Chief Economist Lawrence Yun finds mixed results among the commercial sectors. “Job creation in the second quarter was about half of what we saw in the first quarter, which is moderating demand in the office sector,” he said. “Industrial and warehouse space is holding on better because imports and exports have advanced. While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner – Canada.”
Although still positive, dampened demand is slightly moderating rent growth with the exception of the multifamily market. “Sharply higher demand for apartments is causing rents to rise at faster rates,” Yun said. “A return to normal household formation will mean even lower vacancy rates and higher rents in the future.”
Credit crunch continues
The current commercial real estate cycle has been driven by shifts in demand without an oversupply of new construction. “The difficulty small businesses have in getting commercial real estate loans for leasing or purchase is keeping a lid on demand,” Yun explained. “Multifamily is the only commercial sector with a notable growth in new space, with some lending provided through government loans.”
With the exception of multifamily, vacancy rates remain above historic averages seen since 1999. Over that timeframe the typical vacancy rate has been 14.4 percent for the office market, 10.1 percent in industrial, 8.1 percent for retail and 5.8 percent in multifamily.
Vacancy rates are marginally declining and rents are modestly rising in all of the sectors, but significant changes in the outlook are unlikely before the end of the year. Many corporate decisions on spending and job hiring are on hold given uncertainty over the upcoming elections, whether Congress will effectively avoid a “fiscal cliff,” and unsettled issues such as health care and banking/financial regulations.
“Overall companies hold plentiful cash reserves, but they are hesitant to hire without clarity over how these outstanding issues will impact the bottom line,” Yun said.
“Commercial real estate gains could be thwarted if lending from small and community banks dry up from excessive regulatory compliance costs, and if international big-bank capital rules are applied to smaller lending institutions,” Yun added.
NAR’s latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc. a source of commercial real estate performance information.
Vacancy rates in the office sector are expected to fall from an estimated 16.1 percent in the third quarter to 15.6 percent in the third quarter of 2013.
The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 10.0 percent; and New Orleans, 12.8 percent.
Office rent is projected to increase 2.0 percent this year and 2.6 percent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, should be 24.1 million square feet in 2012 and 47.8 million next year.
Industrial vacancy rates are forecast to decline from 10.7 percent in the third quarter of this year to 10.5 percent in the third quarter of 2013.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.6 percent; Los Angeles, 4.8 percent; and Miami at 6.8 percent.
Annual industrial rent is likely to rise 1.7 percent in 2012 and 2.4 percent next year. Net absorption of industrial space nationally is seen at 59.8 million square feet this year and 67.2 million in 2013.
Retail vacancy rates are projected to decline from 10.9 percent in the third quarter to 10.7 percent in the third quarter of 2013.
Presently, markets with the lowest retail vacancy rates include San Francisco, 3.8 percent; Fairfield County, Conn., 3.9 percent; and Long Island, N.Y., and Orange County, Calif., both at 5.3 percent.
Average retail rent is forecast to rise 0.8 percent this year and 1.3 percent in 2013. Net absorption of retail space should be 10.3 million square feet this year and 20.1 million in 2013.
The apartment rental market – multifamily housing – is expected to see vacancy rates drop from 4.3 percent in the third quarter to 4.2 percent in the third quarter of 2013; vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.
Areas with the lowest multifamily vacancy rates currently are Portland, Ore., at 2.0 percent; New York City and Minneapolis, both at 2.2 percent; and New Haven, Conn., and San Jose, Calif., both at 2.4 percent.
Average apartment rent is likely to increase 4.1 percent in 2012 and another 4.4 percent next year. Multifamily net absorption should be 219,300 units this year and 236,600 in 2013.
NAR Chief Economist Lawrence Yun blogged the latest Economic Update, wherein the research staff analyzed recently released economic indicators pertaining to unemployment and imports and exports.
For commercial practitioners, the news is encouraging, particularly in the international trade indicators. In March, imports and exports climbed. Compared to a year ago, imports rose 8.4% over last year, while exports hiked 7.3%.
Imports and exports are perceived as a leading indicator for leasing and purchasing demand in industrial and warehouse properties. The general idea being that you can’t service heightened demand for exports without more industrial and warehouse capacity. On the reverse side, meeting heightened demand for imports requires more access to warehouse space along major trade routes.
(Readers interested in ideas as to where these routes will grow might be interested in Sam Fisher’s talk on the future of Warehousing, where the head of industrial practice at Jones Lang LaSalle addressed the NAR Commercial audience at the 2011 convention.)
Lawrence Yun goes on to describe the role of international trade in broad terms applicable to CRE:
Though the widening trade deficit will hold back current economic growth by a few decimal points, the broad increases in international trade is critical to a long-term rise in standard of living. Extra international competition always forces companies to shape up and drive towards efficiency while consumers are exposed to better products.
The falling international trade in 2008 and 2009 were due to the harsh economic recession, when the U.S. economy lost 8 million jobs and the number of people filing for unemployment checks skyrocketed. The Great Depression of the 1930s was also associated with a major collapse in international trade. Many European countries after the First World War sunk into terrible economic hardship as many newly created small-sized countries started to impose foreign tariffs (say between Croatia and Austria) which previously had not existed as part of the Austrian-Hungarian Empire. The disintegration of Soviet Union and its equivalent of the Great Depression in the 1990s was also associated the sudden collapse in border trade, say between Ukraine and Russia. In a more recent example, North Korea today is one of the poorest countries in the world because it believes principally in domestic production without foreign competition.
While leasing, construction and vacancy rates appear more or less flat, leading economic indicators are looking up and expected to bring the commercial markets along in 2012. That’s the upshot of NAR’s latest Commercial Real Estate Outlook along with SIOR’s Commercial Real Estate Index.
NAR Chief Economist Lawrence Yun: “Vacancy rates are expected to trend lower and rents should rise modestly next year. In the multifamily market, which already has the tightest vacancy rates in any commercial sector, apartment rents will be rising at faster rates in most of the country next year. If new multifamily construction doesn’t ramp up, rent growth could potentially approach 7 percent over the next two years.”
Looking at commercial vacancy rates from the fourth quarter of this year to the fourth quarter of 2012, NAR forecasts vacancies to decline 0.6 percentage point in the office sector, 0.4 point in industrial real estate, 0.8 point in the retail sector and 0.7 percentage point in the multifamily rental market.
The Society of Industrial and Office Realtors®, in its SIOR Commercial Real Estate Index, an attitudinal survey of 231 local market experts,1 shows the broad industrial and office markets were relatively flat in the third quarter, in step with macroeconomic trends. The national economy continues to affect the sectors, with 92 percent of respondents reporting the economy is having a negative impact on their local market.
Even so, the SIOR index, measuring the impact of 10 variables, rose 0.6 percentage point to 55.5 in the third quarter, following a decline of 2.6 percentage points in the second quarter. In a split from the recent past, the industrial sector advanced while the office sector declined.
The next commercial real estate forecast and quarterly market report will be released on February 24.