The office vacancy rate dropped 20 basis points (bps) during the quarter to 15.3%. The decline confirms the national office market’s ongoing recovery despite slow economic growth. National vacancy now stands 170 bps below its peak in Q2 2010.
National industrial availability1 decreased by 30 bps during the quarter to 12.0%. While modest, the decline is one of the strongest since the industrial sector recovery began in 2010.
The retail availability rate also fell 30 bps to 12.2%. This marks the second consecutive quarter that availability has dropped 30 bps, reflecting improved retailer confidence as consumer spending continues to rebound.
Demand for the nation’s apartment buildings remained robust with vacancy in Q2 2013 of 4.6%, a decrease of 20 bps from Q2 2012 and 50 bps from Q1 2013.
The office vacancy rate’s decline to 15.3% was driven by slowly improving fundamentals as tenants took advantage of opportunities from the lingering space overhang following the recession. The recovery was broad based with a majority of local markets (39 of 63) recording vacancy rate declines and 17 showing increases. As with the previous quarter, smaller markets were the best performers; Riverside and Toledo led all markets with vacancy rate declines of 170 bps each, followed by Richmond and Las Vegas with declines of 160 bps and 130 bps respectively.
Technology and energy markets have done exceptionally well during the recovery while markets that were severely affected by the housing bust have been among the best performers thus far in 2013. The office market recovery is broadening and markets previously considered as “distressed” are catching up to the rest of the nation.
“While the year-to-date improvement in the vacancy rate is on par with last year’s performance, the labor market’s strength has been impressive, with monthly payroll gains for businesses averaging nearly 190,000 in 2013,” said Mr. Southard. “The 57,000 jobs added in the office-using professional and business services sector in May supports the view that total office-using employment is on its way to surpassing the pre-recession peak by early next year.”
The industrial availability rate of 12.0% in Q2 2013 is 110 bps below its year-ago level and 270 bps below the recessionary peak in the second quarter of 2010. The industrial market recovery has now continued for 12 consecutive quarters, with the three most recent quarters showing the largest drops in availability. Improvements remain broad based, with a majority of markets (45) reporting declines and only 10 showing increases.
The availability drop during the quarter was led by Fort Worth (-210 bps), Nashville (-160 bps), and Akron (-130 bps). Of the markets that showed a decline, half fell by 50 bps or more, including Dallas, Houston, and Riverside. Among the 10 largest industrial markets, all but 2 declined during the quarter, with only Los Angeles and Detroit showing slight increases. This improvement has occurred despite the backdrop of weaker trade amid the ongoing recession in Europe and slowing growth in China.
The Q2 2013 retail availability rate of 12.2% was a drop of 30 bps compared with the previous quarter and was down 70 bps compared with a year ago. Already in the first half of 2013 availability rates have dropped 60 bps, with all but three markets witnessing improvement or stabilization of availability rates compared with Q2 2012. Top performers included Louisville, Kansas City, Columbus, Charlotte and Memphis; each of these markets recorded a decline of 70 bps or more. On the other end of the spectrum, markets such as Denver, Raleigh and Edison (New Jersey) recorded increases in availability rates of at or over 30 bps in the second quarter.
Sales growth at retail centers across the US has gained momentum over the past couple of months. Growth is still slightly below long-term trends but consumers seem to be maintaining their spending on most types of goods. With the housing recovery projected to improve in the coming months, retailers who sell housing-related goods and who were the hardest hit during the downturn should benefit. Both discretionary and necessity retailers have already reached and surpassed their pre-recession sales highs.
Preliminary data indicates that apartment demand has regained its momentum, growing at its strongest pace since the end of 2010. The vacancy rate for professionally-managed apartment units dropped to 4.6% in Q2 2013 and the market remains tight by historical standards, with the four-quarter trailing average edging down to 4.8%, 50 bps below the long-term (20-year) norm.
Apartment vacancy rates declined from a year ago in 36 of the 63 markets monitored. Markets with the biggest year-over-year decreases (more than 100 bps) included Greenville, Seattle, Detroit, Houston, and Newark. Those with the largest year-over-year increases in vacancy (more than 50 bps) included El Paso, Pittsburgh, Albuquerque, Salt Lake City, Hartford, Birmingham, Fort Lauderdale, Louisville, Edison, Orange County, Philadelphia, and Washington, DC. Markets with the lowest vacancy rates (at or below 3%) included Minneapolis, Miami, Oakland, Providence, San Jose, Newark, Boston, and Portland. Markets with the highest vacancy rates (at or above 7%) included Tucson, El Paso, Las Vegas, Memphis, Atlanta, and Jacksonville.
With occupancy staying below the historical norm, effective rent growth should remain healthy in 2013 as the U.S. economy and housing market continue to recover. With effective rents now above their pre-recession levels in most major markets, new apartment construction activity has picked up in recent months and completions are likely to return to historical norm towards the year’s end. As a result, rent and revenue growth in 2013 are likely to be slower than in 2012.
1 Availability is space that is actively being marketed and available for tenant build-out within 12 months.
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