22 Consecutive Quarters of Lower or Flat Office Vacancy and Industrial AvailabilityContinued Improvement in Retail and Apartment Demand
The U.S. commercial real estate market shows continued healthy demand across all property types during the third quarter of 2015 (Q3 2015), according to the latest analysis from CBRE Group, Inc.
In Q3 2015:
- The office vacancy rate declined 10 basis points (bps) to13.4%. The vacancy rate has now been flat or declined for 22 consecutive quarters.
- The industrial availability* rate continued to decline, falling by 20 bps to 9.6%. The industrial availability rate has also been flat or declined for 22 consecutive quarters.
- The retail availability rate declined 10 bps to 11.3%, 30 bps below its level a year ago.
- Demand for the nation's apartment buildings remained strong with vacancy declining 20 bps, compared to a year earlier, to 4.2% in Q3 2015.
“The commercial real estate markets remain near a ‘Goldilocks’ equilibrium, neither too hot nor too cold. The pace of supply is increasing, but demand remains solid and rent growth is increasing at a sustainable level,” said Jeffrey Havsy, Americas chief economist for CBRE. “Economic fundamentals are pointing to a sustained U.S. office expansion in 2015, with firms continuing to hire workers and office market investment volumes staying high.”
Demand continued to push office vacancy lower in Q3 2015, with the vacancy rate declining 10 bps to 13.4%, down from the previous quarter’s 13.5%. The rate has dropped 80 bps over the past four quarters, to its lowest point since Q2 2008. There has been no increase in the national office vacancy rate since the end of Great Recession—22 consecutive quarters.
Both suburban and downtown markets saw vacancy fall in Q3 2015, with the suburban rate dropping by 10 bps, to 15% and the downtown rate declining 20-bps to 10.4%, the lowest rates for both since 2008. Indianapolis recorded the largest quarterly decline (210 bps), while Miami, Oakland and San Jose each declined by more than 100 bps. Over the past four quarters, markets in California, the Southeast and the Midwest have seen the greatest improvement. Among these are Jacksonville, Ventura, Indianapolis, San Jose, Detroit, Oakland, Orlando, Nashville and Orange County. The nation’s lowest Q3 vacancy rates were in San Francisco (6.5%), Austin (8.1%), Nashville (8.2%), Albany (8.4%) and New York (8.9%).
“The Federal Reserve’s September decision to delay its interest rate hike will help to keep interest rates down, further promoting real estate investment,” noted Mr. Havsy. “Robust office demand is expected to continue to outpace new supply in the near future, leading to further tightening of the vacancy rate and keeping rent growth above inflation in a majority of U.S. office markets.”
The Q3 2015 industrial availability rate of 9.6% marked 22 consecutive quarters of flat or declining rates, the longest stretch since CBRE began tracking the national market in 1989. Thirty nine markets out of 57 industrial markets reported declines in Q3 as demand continued to be healthy. Significant availability declines included Los Angeles, New York and Philadelphia, each of which fell 40 bps. Charlotte led the declines with a 140-bp drop.
“Fundamental conditions on the demand side continue to be healthy across the industrial markets,” said Mr. Havsy.”However the declines in availability could slow, despite continued strong demand, as more new supply is delivered to the market.”
The Q3 2015 retail availability rate of 11.3% is now 200 bps below its post-recession peak of 13.3% in Q2 2011. Forty of the 62 markets tracked saw availability declines in Q3. Louisville, Jacksonville and Philadelphia were among those whose availability rates rose between Q2 and Q3. The greatest increases compared to one year ago were in Oklahoma City; Tampa; Wilmington, DE; San Jose and Philadelphia.
“Core retail sales have remained above their historical average, with strong sales concentrations in food services and drinking establishments, and the housing-related segments,” said Mr. Havsy. “With gasoline cheap, interest rates low and a sturdier labor market, we expect retail spending to continue growing.”
Preliminary data shows that apartment demand remained robust in Q3 2015 with vacancy at 4.2%. This is lowest vacancy since Q1 2001, when the rate was 3.9%. The decline continues a sustained downward move in the national vacancy rate, a trend which has gained momentum over the past few years. Compared to a year earlier vacancy rates declined in 39 of the 62 markets while rising in 18 recorded increases and staying the same in five. Jacksonville (-150 bps), Phoenix (-80 bps), and Fort Worth (-70 bps) showed the largest year-over-year declines. A remarkable 16 markets posted Q3 2015 vacancy rates below 4%. The tightest markets include those in the Greater New York City area, San Francisco and Oakland, Los Angeles, Miami, Boston, Minneapolis, Portland, Detroit, Salt Lake City, San Diego and Nashville.
“The apartment market is expected to continue to tighten through the end of this year and into 2016, amid strong rental demand and solid U.S. economic growth,” noted Mr. Havsy. “However, high effective rent levels will bring a considerable amount of apartment construction over the next couple years. Demand growth in most markets is strong enough to absorb this activity, but construction activity relative to demand is a potential risk if the global economy slows.”
* 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 70,000 employees (excluding affiliates), and serves real estate owners, investors and occupiers through more than 400 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.