The U.S. commercial real estate had a strong finish to 2013 with continued recovery in the fourth quarter (Q4 2013), according to the latest analysis from CBRE Group, Inc.
- In Q4 2013, national industrial availability1 decreased by 40 bps to 11.3%. The rate declined 140 bps during 2013 and is now 330 bps below its recessionary peak.
- The retail availability rate declined 30 bps to 12.0% and was down 70 bps for 2013.
- Demand for the nation’s apartment buildings remained strong with vacancy of 5.0% in Q4 2013.
“Commercial real estate closed out 2013 on an encouraging note,” said Jon Southard, Managing Director of CBRE’s Econometric Advisors group. “Strong demand for space across all product categories bodes well for real estate investment and for the economy.”
Vacancy improvement continues to be broad-based, with a majority of markets seeing declines over the previous quarter. Rates fell in 44 of the 63 U.S. office markets tracked, rose in 15 and remained unchanged in 4. The suburban vacancy rate fell for the seventh consecutive quarter—by 20 bps, to 16.3%; while the downtown rate fell by 10 bps, to 12.3%.
As with previous quarters there were signs of an expanding recovery nationally as small markets were among the best performers in the fourth quarter; Wilmington, Nashville and Trenton’s vacancy rates fell by 310, 160 and 130 bps, respectively, to 17.6%, 10.4% and 11%. Also among the best performers were markets with a strong presence of technology firms like San Jose and Boston, whose vacancy rates fell by 90 and 80 bps, respectively, to 13.9% and 11.2%.
“While the annual 60 bps decline in the office vacancy rate was impressive given the headwinds facing the U.S. economy; at 14.8%, the vacancy rate remains elevated compared with pre-recessionary levels,” noted Mr. Southard. “We expect office demand to strengthen appreciably in 2014 given that office-using payrolls have already surpassed their previous peak and employment growth has improved in recent months despite the government shutdown. Led by the private sector, employment gains of 193,000 on average over three months are a good sign for future commercial real estate demand.“
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 11.3%, has seen its recovery extend to 14 consecutive quarters, with notable strength during 2013. A solid majority of markets showed improvement during the quarter; 48 of 61 markets reported declines in availability. Just eight reported increases, while five remained unchanged from the previous quarter.
Larger markets were among the leaders in availability decline during the quarter. Riverside
(-150 bps), Dallas (-100 bps) and Minneapolis (-100 bps) all showed impressive declines; they were joined by Fort Worth (-140 bps) and Wilmington, Del. (-100 bps) in posting declines of one percentage point or more. The number of markets recording declines by 50 bps or more increased to 27 during Q4 2013 from 19 in Q3 2013, evidence of a broad-based recovery across the nation. The two largest industrial markets, Chicago and Los Angeles, saw availability fall by 10 and 20 bps, respectively.
“Q4 2013 marked the second strongest quarterly improvement of the recovery and there is no indication that the recovery will stop anytime soon. Higher levels of new supply coming online in some markets may limit the extent of further availability declines but demand for industrial space will remain strong,“ noted Mr. Southard.
CBRE forecasts the national industrial availability rate will decline an additional 30 basis points in 2014.
In Q4 2013 the retail availability rate fell to 12.0%, reflecting continued net absorption gains. The magnitude of this drop matches the momentum of the first half of 2013 and reflects a re-acceleration following the flat trend in the third quarter: retailers were eager to absorb space once again during the holiday shopping season.
The majority of markets recorded declining availability rates in Q4 2013; nineteen markets recorded flat or increasing rates. Houston, Austin, Detroit and Fort Worth recorded declines in availability rates of at or over 60 bps in Q4 2013. Other markets which recorded decreasing rates were Albuquerque, Charlotte, Nashville and Chicago; with the exception of Albuquerque these markets remain below what they were one year ago. Markets showing the most improvement during 2013 include Fort Worth, Dallas, Houston and Memphis. New York, San Diego, Albuquerque, Raleigh and Tampa are the only markets with higher availability than a year ago.
CBRE forecasts the availability rate for neighborhood and community shopping centers in 2014 to decline to 10.6%.
Preliminary data indicates that apartment demand grew at a strong pace in Q4 2013. The vacancy rate for professionally-managed apartment units came in at 5%, holding steady relative to a year earlier. The seasonal increase in the vacancy rate that usually takes place at the end of the year turned out to be lower than expected. The market remains tight by historical standards, with the four-quarter average continuing to trail at 4.8%—50 bps below the long-term (20-year) norm. It is clear, however, that major declines in vacancy rate are no longer likely and moderate year-over-year increases are more likely to take place in this phase of the cycle.
Vacancy rates declined in 27 of the 63 markets in CBRE’s coverage, compared to a year ago. Markets with the biggest year-over-year declines in vacancy (80 bps or more) included Las Vegas, Jacksonville, Houston, West Palm Beach, Greensboro, Sacramento, Fort Lauderdale, and Memphis. Those with the largest year-over-year increases (80 bps or more) included Salt Lake City, Kansas City, Albuquerque, El Paso, Tulsa, Indianapolis, Birmingham, Louisville, and Cleveland. Markets with the lowest vacancy rates (3.5% or less) included Oakland, Miami, Newark, Minneapolis, Edison, Portland, San Jose, and Providence.
“With occupancy staying below the historical norm, effective rent growth should remain healthy going into 2014 as the U.S. economy and housing market continue to recover,” said Mr. Southard. “With effective rents now well above their pre-recession levels in most major markets, apartment starts have picked up considerably in recent months and completions are bound to return to their historical norm towards the end of the year. Rent growth for 2014 is shaping up to be similar to 2013, but slower than in 2011-2012.”
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 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.