Los Angeles, October 10, 2013 – The U.S. commercial real estate market continued a slow, but steady recovery in the third quarter of 2013 (Q3 2013), according to the latest analysis from CBRE Group, Inc.
The office vacancy rate dropped 10 basis points (bps) during the quarter to 15.1%. The quarterly change was slightly slower than last quarter’s 20 bps decline but in absolute terms, vacancy was 50 bps below the Q3 2012 rate of 15.6%. However, the continued progress reflects the office market’s ability to withstand the effects of the federal government’s spending reductions – known as the “sequester” – while dealing with an already sluggish pace of economic growth.
In Q3 2013, national industrial availability1 decreased by 30 bps from the previous quarter, to 11.7%. The rate is 130 bps below its year-ago level, and 290 bps below its recessionary peak.
The retail availability rate declined 10 bps to 12.2% and was down 70 bps compared to the rate one year ago.
Demand for the nation’s apartment buildings held steady with vacancy of 4.6% in Q3 2013.
“Office market occupancy inched ahead in the third quarter. The slow progress remains consistent with a growing but fragile economy,” said Jon Southard, Managing Director of CBRE’s Econometric Advisors group. “However, industrial markets continue to out-perform due to improved foreign trade and resilient consumer and business spending at home.”
Vacancy improvements remain reasonably broad-based with a majority of markets seeing declines over Q2 2013. Rates fell in the majority of local markets (38 of the 63 tracked) with 18 markets showing increases. The suburban vacancy rate fell for the sixth consecutive quarter, by 20 bps to 16.6%, while the downtown rate rose by 10 bps to 12.4%. While vacancy rates in most of the downtown major markets fell, these declines were offset by an increase in Downtown Manhattan, driven by downsizing and relocations of financial services and professional and business services firms.
As office market improvements continue to broaden across the country, markets with very high vacancy rates were among the best performers in the second quarter: Detroit and Edison’s (suburban New Jersey) vacancy rates fell by 110 bps and 100 bps respectively, to 23.4% and 22.2%. Despite these sharp drops, vacancy rates in these markets remain above their pre-recession lows and are in the process of catching up to the rest of the nation. Also among the best performers were Richmond and Kansas City, where vacancy rates fell by 90 bps each, as well as Riverside (CA) and Phoenix, where vacancy rates fell by 80 bps each. The largest vacancy rate increase outside of Downtown Manhattan was in San Jose where the vacancy rate rose by 130 bps in the third quarter to 14.8% – largely driven by new completions.
“While the partial federal government shutdown has added more uncertainty, it is likely to be a short-term disruption at the national level,” said Mr. Southard. “The office market has performed as well as can be expected in light of the uncertainties. Private hiring has remained healthy over the past year, with businesses adding 190,000 new jobs each month through August and the dearth of new office construction will continue to help the market to recover.”
The industrial availability rate, now at 11.7%, has now seen 13 consecutive quarters of improvement, with the largest drops occurring in the last four quarters. The recovery remains broad-based with a majority of local markets (42) reporting declines since last quarter and only 14 posting increases. The availability drop during the quarter was led by Charlotte and Trenton (-230 bps), Allentown (-160 bps), and San Francisco (-120 bps). Of the markets that showed declines, half – including Dallas, Cleveland and Atlanta – fell by 40 bps or more. Chicago and Los Angeles, the two largest industrial markets, each reported a decrease of 20 bps.
The continued improvement in the pace of industrial market recovery reflects improved foreign trade and resilient consumer and business spending at home. Europe’s economies appear to have stabilized and China shows signs of strengthening, which should facilitate broader trade improvements and help to fuel further growth in the industrial market. Domestic uncertainty persists with the ongoing government shutdown, and further debate about increasing the debt limit is expected before an October 17 2013 deadline.
The Q3 2013 retail availability rate decrease to 12.2%, which did not match the momentum of the first half of 2013, although the net absorption trends should remain positive for the second half of the year. There was an increase in the number of markets recording rising availability rates compared to Q2 2013. Markets such as New York, Tampa and Cleveland recorded increases in availability rates at or above 60 bps in Q3. Markets that showed improved availability rates included Dallas, Trenton, Cincinnati and Fort Worth; each of which declined by 40 bps or more. Most markets remain below their availability rates of a year ago, with the exception of Tampa, Raleigh, West Palm Beach, Riverside, Fort Lauderdale and New York.
Retail sales growth has been volatile over the past couple of months. Growth still hovers slightly below its long-term trend and consumers seem more cautious as the holiday shopping season gets underway. One bright spot is that the housing recovery is projected to continue to improve in the coming months, benefiting retailers who sell housing-related goods. These retailers were the hardest hit during the downturn and have yet to get back to their pre-recession sales peaks (other discretionary and necessity retailers have already reached and surpassed their pre-recession highs).
Preliminary data indicates that apartment demand continues to expand, but at a slower pace than last quarter. The vacancy rate for professionally-managed apartment units kept steady at 4.6% in the third quarter of 2013 – an increase of 10 bps points from a year ago. The market remains tight by historical standards, with the four-quarter average trailing vacancy rate near 4.8%, or 50 bps, below the long-term (20-year) norm.
Compared to a year ago, vacancy rates declined in 20 of the 63 markets monitored. Markets with the biggest year-over-year declines in vacancy (more than 80 bps) included Sacramento, Atlanta, Dallas, Houston, Jacksonville, Portland and West Palm Beach. Those with the largest year-over-year increases in vacancy (more than 80 bps) included Cincinnati, Indianapolis, St. Louis, Birmingham, Columbus, Richmond, Dayton, Pittsburgh, Cleveland, Albuquerque, Louisville, Salt Lake City, and El Paso. Markets with the lowest vacancy rates (at or below 3%) included Minneapolis, Oakland, Portland, San Jose, Miami, and Newark. Markets with the highest vacancy rates (at or above 7%) included Phoenix, Greensboro, Indianapolis, Las Vegas, Memphis, Tucson, and El Paso.
With vacancy staying below the historical norm, effective rent growth for apartment properties should remain healthy through the balance of 2013 and into 2014 as the U.S. economy and housing market continue to recover. With effective rents now well above their pre-recession levels in most major markets, apartment starts have picked up in recent months and completions are likely to return to historical norms towards the year’s end. As a result, rent and revenue growth in 2013-2014 is shaping up to be slower than in 2011-2012.
1 Availability is space that is actively being marketed and available for tenant build-out within 12 months.
About CBRE Group, Inc.
CBRE Group, Inc. (NYSE:CBG), a Fortune 500 and S&P 500 company headquartered in Los Angeles, is the world’s largest commercial real estate services and investment firm (in terms of 2012 revenue). The Company has approximately 37,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 300 offices (excluding affiliates) worldwide. CBRE offers strategic advice and execution for property sales and leasing; corporate services; property, facilities and project management; mortgage banking; appraisal and valuation; development services; investment management; and research and consulting. Please visit our website at www.cbre.com.