WASHINGTON, DC—Vacancy rates will see declines over the next year among the major commercial property sectors aside from multifamily as the economy continues improving, the National Association of Realtors said Tuesday. However, NAR also forecasts prices to dip in 2016 as the Federal Reserve begins increasing interest rates—a move also triggered by an improving economy.
“Temporary turbulence in the financial markets, a stronger US dollar hurting exports and economic weakness overseas chipped away at third-quarter growth and led to some deceleration in the pace of commercial investments,” says Lawrence Yun, NAR’s chief economist. “The good news is that these deterrents are slowly residing, which should ultimately reawaken the growing appetite for commercial space heading into next year.”
NAR predicts an 80-basis point decline in office vacancies next year to 14.8%, while industrial’s vacancy will drop 140 bps to 9.7% and retail’s 130 bps to 11.3%. Apartment deliveries, though, are seen contributing to a 120-bp increase in nationwide multifamily vacancy to 7.3% over the next 12 months.
“The best days for multifamily housing could be winding down as new construction has already surpassed historical averages,” Yun says. “This sector has been the industry’s top performer over the past several years as a result of younger households struggling to become homeowners and the demand apartments far exceeding supply in many markets.” That uptick in vacancy is expected to be more pronounced in several states across the South and West, which have outperformed the nation in terms of job growth and therefore have drawn a greater share of new builds to meet demand.
Over the coming year, investment sales are expected to continue on an upward trend, although pricing will cool slightly. Yun notes that in recent years, rising sales and investor optimism have pushed prices “past their peak in many of the larger commercial markets.” Accordingly, he says, investors in search of yield are likely to gravitate to smaller markets and lower-end properties.
Longer term, Moody’s Analytics said last week that by 2020, pricing on both coasts would cool, while markets in the heartland and the Southeast would see faster increases in pricing. The forecast, which is the first from Moody’s using Real Capital Analytics Commercial Property Price Indices, says that commercial property markets in New York City, Boston, Oakland and San Francisco are overvalued. Conversely, Atlanta, Jacksonville, Chicago and markets in Ohio have been undervalued and will see faster appreciation as a result.
“As the decade unfolds, national commercial property price gains are expected to slow meaningfully, crimped by rising interest rates and increased supply, especially in the markets that are currently hottest,” says Mark Zandi, chief economist at Moody’s Analytics. “Using our forecasts of the RCA CPPI, investors can assess the impact of economic and financial market conditions on their commercial real estate portfolios, reduce risk exposures and optimize their decision making.”
