Los Angeles, April 8, 2014 – The U.S. commercial real estate market continued to recover steadily in the first quarter (Q1) of 2014, according to the latest analysis from CBRE Group, Inc.
The office vacancy rate declined by 10 basis points (bps) to reach 14.8% in Q1 2014. Although vacancy rate improvements slowed in Q1 2014 compared to Q4 2013, the national office recovery continues to move in the right direction, with vacancies declining in a majority of the markets.
In Q1 2014, national industrial availability1 decreased by 20 bps from the end of 2013, to 11.1% in Q1 2014.
The retail availability rate declined 10 bps to 11.9%, marking the first time retail availability has been below 12% since 2009.
Demand for the nation’s apartment buildings remained strong with vacancy of 4.9% in Q1 2014.
“Real estate fundamentals continued to improve despite the harsh winter weather in the initial months of 2014,” said Jon Southard, Managing Director of CBRE’s Econometric Advisors group. “Sentiment suggests that companies are looking forward to future demand and beginning to respond with expansion plans.”
Q4 2014 marked the first time in a year and a half that the downtown submarkets outperformed the suburbs, as the downtown vacancy rate fell by 10 bps to 12.2% and the suburban vacancy rate remained unchanged at 16.3%. A majority of markets continued to see their vacancy rates fall during the quarter, with rates falling in 34 of the 63 U.S. office markets tracked, rising in 24 and unchanged in five. Consistent with recent quarters, smaller markets were among the best performers; vacancy rates in Baltimore, San Antonio and Stamford fell by 130 bps, 130 bps and 120 bps to 13.2%, 17.4% and 16.6% respectively.
Improvements continue to accelerate in the California, Nevada, Florida and Arizona markets, which were the worst affected regions during the housing crisis. Tucson and Tampa were among the best performers in Q1 2014 with total vacancy declines of 90 bps and 60 bps respectively. The Washington, D.C. office market saw its vacancy rate rise by 30 bps for the second quarter in a row; however, there were positive signs as the District’s vacancy rate fell by 20 bps, while the suburban vacancy rate rose by 50 bps in Q1 2014.
“The strength in private sector employment has been a key factor supporting demand for office space and is expected to remain strong throughout 2014,” noted Mr. Southard. “The total private employment growth average of 182,000 jobs per month in the first three months of the year is a positive sign for future office space demand, especially with professional and business services — a key office-using sector — leading the way. “
CBRE forecasts the U.S. office market vacancy rate will continue to decline in 2014, falling to 14.3% by year end.
The industrial market, with the availability rate now at 11.1%, has seen its recovery continue for 15 consecutive quarters. The 20-bps drop was the smallest quarterly decline in six quarters, underscoring the recovery’s maturation as many markets are starting to see more significant development. A majority of markets continued to improve during Q1 2014, with 40 out of 61reporting declines in availability, while nine markets remained unchanged and 12 showed increases.
The declines in availability across individual markets showed fewer extreme drops than in some of the recent quarters, with the three largest markets with the strongest declines all less than one percentage point: Atlanta (-80 bps), Detroit (-80 bps), and Philadelphia (-70 bps). The 200 bps increase in availability in Forth Worth, unusual for a market of its size, was partially due to a single 4.7-million-sq. ft. complex that became available during Q1 2014. Across most markets, there continued to be healthy demand.
“The first quarter of 2014 showed the demand for industrial real estate has continued, albeit at a slightly slower pace than the past year. But this does not mean conditions in the market are weakening,“ noted Mr. Southard. “The two forces pushing against lower rate of decline in availability are arguably both good signs: First, we are seeing higher levels of construction than we have since the recovery began. Second, there are a handful of markets that are already fully recovered or very near that mark, which will lead to stronger rent growth in the coming quarters, in some cases beyond prior peaks.”
CBRE forecasts the national industrial availability rate will decline an additional 30 bps in 2014 to 10.8%.
Q1 2014’s retail availability rate of 11.9% was down 60 bps compared to the rate one year ago. This is the first time that the availability rate has dipped below 12% since early 2009, although the rate still remains high compared with 7.4% at its low point in Q4 2005, prior to the downturn. This decline in availability should translate into continued net absorption gains in the first quarter.
The majority of markets recorded declining availability rates in in Q1 2014; 19 markets recorded flat or increasing rates. Honolulu, Tucson, Charlotte and Fort Lauderdale recorded declines in availability rates at or more than 60 bps in Q1 2014. Those markets with the greatest availability decline compared to one year ago were Fort Worth, Pittsburgh, Dallas and Tucson. Markets which recorded a significant rise in availability were Salt Lake City, Chicago, San Francisco, and Jacksonville; each of these markets remains at or above what they were one year ago.
CBRE continues to forecast that the availability rate for neighborhood and community shopping centers will decline to 10.6% in 2014.
Preliminary data indicates that apartment demand continued to expand at a steady pace in Q1 2014. The vacancy rate for professionally-managed apartment units of 4.9% was a drop of 20 bps compared to a year ago. The market remains tight by historical standards, with the vacancy rate below the long-term norm. The national apartment demand is now growing at a rate of over 220,000 units or 1.6% on an annual basis, a pace that is stronger than what the market has seen historically.
Vacancy rates declined in 40 of the 63 markets in CBRE’s coverage. Markets with the biggest year-over-year declines in vacancy (80 bps or more) included Jacksonville, Riverside, Sacramento, Nashville, St. Louis, Houston, Las Vegas, Atlanta, El Paso, Portland, Greensboro, Memphis, and Orange County. Those with the largest year-over-year increases in vacancy (70 bps or more) included Greenville, Oklahoma City, Birmingham, Cleveland, Pittsburgh, Albuquerque, Indianapolis, Salt Lake City, San Antonio, and Dayton. Markets with the lowest vacancy rates (at or below 3.5%)) included Minneapolis, Portland, Miami, Oakland, Newark, Ventura, San Jose, Edison, Orange County, and San Diego. Effective rent growth has improved slightly last quarter but remains in 2.5-3% per year range in most areas.
CBRE forecasts that the U.S. multi-housing market vacancy rate will average 5.3% in 2014.
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 2013 revenue). The Company has approximately 44,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through approximately 350 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.