Industrial and Apartment Demand Strong
The U.S. commercial real estate market showed continued strength across all property types in the first quarter of 2015 (Q1 2015), according to the latest analysis from CBRE Group, Inc.
- The office vacancy rate* declined by 10 basis points (bps) from the previous quarter to 13.9% in Q1 2015. The office vacancy rate has fallen 100 bps over the past four quarters, and now sits at its lowest mark since 2008.
- In Q1 2015, national industrial availability1 dropped 20 bps from Q4, to 10.1%—a full percentage point below the year-ago level.
- Retail demand remained steady with the Q1 2015 availability of 11.5%, unchanged from the prior quarter.
- Demand for the nation's apartment buildings remained strong with vacancy of 4.5% in Q1 2015.
“Continued improvement in office vacancy will be dependent on the pace of hiring,” said Jeffrey Havsy, Americas Chief Economist for CBRE. “We believe March’s relatively weak job growth was a pause, but should that trend continue several markets with heavy construction activity could see a reversal in the recent trend toward lower vacancy.”
Q1 2015 marked the 12th consecutive quarter of office vacancy rate declines. The trend remains broad-based across U.S. office markets. Vacancy fell in 41 of the 62 markets, rose in 18, and remained unchanged in three. Absorption of office space in the quarter was 9.5 million sq. ft. Suburban markets drove the overall improvement with a decline of 20 bps to 15.4%. Performance in downtown markets was mixed; vacancy increases in several large metros pushed the downtown rate up 10 bps during the quarter, to 11.2%.
Newark, San Jose and Las Vegas recorded the largest quarterly declines in Q1 2015, each above 100 bps. Over the past year, markets in the South and West have seen the greatest improvement. Among these are Orange County, Austin, Salt Lake City, San Jose, Las Vegas and Raleigh. The nation’s lowest vacancy rates in Q1 were in San Francisco (7.1%), Austin (7.9%), Pittsburgh (9.2%) and New York (9.3%).
“Economic fundamentals point to a sustained U.S. expansion in 2015, with businesses more confident than they were earlier in the recovery cycle,” noted Mr. Havsy.”There remains pent-up demand in key segments such as housing and subdued inflation will allow the Federal Reserve to keep interest rates low for several more months, helping to support above-trend growth.”
The industrial real estate recovery has now continued for 19 quarters, the longest uninterrupted stretch of declining availability since CBRE began tracking industrial market activity in 1980. The start of 2015 saw the vast majority of markets continue to improve—41 reported declines in availability, while four remained unchanged and 12 recorded increases.
Lower availability rates were widespread across markets of all sizes and in all regions. The recovery has been rolling long enough that fewer markets are now reporting dramatic drops in availability; the vast majority of Q1 2015’s declines were less than 50 basis points. In fact, “recovery” can be replaced with “expansion” for some markets; a handful have seen availability rates fall below prior cycle lows and rent growth exceed prior highs. Among the 10 largest markets, all but two declined; Dallas and Philadelphia reported slight increases (30 and 10 bps, respectively) during the quarter. Atlanta (-50 bps) and New York (-40 bps) led with the strongest declines.
In addition, Mr. Havsy noted that “industrial activity in Q1 doesn’t appear to have been impacted by the West Coast port slowdown. All the major ports in that region saw vacancy declines last quarter.”
Retail availability remained unchanged between Q4 2014 and Q1 2015. However, availability at year end 2014 was 50 bps below its year-earlier rate and is now 180 bps below the post-recession peak of 13.3%. 34 of the 62 markets tracked had availability decline in Q1 2015, while 28 recorded flat or increasing rates. Forty-three markets have improved upon their rates from one year ago.
Kansas City, Baltimore and Las Vegas were among those recording rising availability rates in Q1 2015. Availability rate declines of 50 bps or more from the previous quarter were recorded in Austin, Louisville and Trenton. The lowest availability rate recorded in Q1 2015 (5.5%) was in San Francisco, while the highest (16.8%) was in Trenton.
“Sluggish retail sales numbers continue to weigh heavily on the retail leasing market,” said Mr. Havsy. “Until personal income and retail sales rise at a faster pace, it is hard to see retail absorption increasing more rapidly.”
Preliminary data shows that apartment demand continued to grow in Q1 2015, with the multifamily housing vacancy rate declining to 4.5%, a 40 bps drop from a year earlier. This represents a continuation of a persistent downward trend in national vacancy rates that began several years ago. The market is very tight and apartment demand remains strong as the vacancy rate pushes closer to its 20-year vacancy low of 3.7%.
Compared to a year earlier, vacancy rates declined in 51 of the 61 markets, while rising in seven and staying the same in three. The following 15 markets experienced the greatest year-over-year declines (of 80 bps or more): Memphis, Jacksonville, Greenville, Fort Worth, Indianapolis, Las Vegas, Fort Lauderdale, Orlando, Birmingham, San Antonio, Tampa, Atlanta, Phoenix, Chicago, and Houston. Among those posting Q1 vacancy rates of 3% or lower were Portland, Newark, Minneapolis, Oakland, Miami, and Los Angeles.
With occupancy remaining high by historical standards, effective rent growth is expected to stay strong well into 2015, provided U.S. economic growth remains steady. Relatively high effective rent levels (exceeding pre-recession peaks in most major markets) have brought increased apartment construction starts in considerable numbers over the past year. Although construction places downward pressure on rents, the market is tight enough to absorb this activity—especially if demand growth keeps pace with economic growth.
*CBRE EA has transitioned to Census 2010 metropolitan area definitions. Under the new definitions, Edison is no longer classified as a market; its submarkets have been merged into New York and Newark. Historical data will differ from what was previously reported.
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 2014 revenue). The Company has more than 52,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 370 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.