Multi-Family Properties Lead Commercial Market in Declining Vacancies, Rising Rates

By: Jann Swanson •

Vacancy rates in commercial and multi-family properties are expected to decline gradually over the next year with an already tight multi-family rental market tightening still further and producing strong rent increases.  The quarterly commercial real estate forecast from the National Association of Realtors® (NAR) puts the current multi-family vacancy rate at 4 percent, less than half that of any of the other commercial categories NAR tracks.

Multi-family vacancies will remain relatively stable over the next five quarters, averaging 4.0 percent through 2013 even as the market absorbs large numbers of units coming on line.  There will be 88,500 new units completed this year, a number that is expected to jump to 143,200 in 2013 and 187,000 in 2014.  The current annual absorption rate of 219,725 will rise to 234,576 in 2013 and 281,518 in 2014 and the inventory will increase from 9.9 million units this year to 10.2 million by the end of 2014.  Areas with the lowest multifamily vacancy rates currently are Portland, Oregon, at 2.1 percent; New York City, 2.2 percent; and Minneapolis, 2.3 percent while the highest rates are in Memphis and Jacksonville, Florida at 8.7 percent and 8.0 percent respectively.

Multifamily rents are projected to increase 4.1 percent in 2012, 1.2 percent of which will come in the current (4th) quarter.  NAR projects another 4.6 percent increase in 2013 and 4.7 percent in 2014. 

The other commercial real estate sectors are also showing gradual improvement and are easily absorbing the relatively small amounts of new space coming on line.  The largest vacancy rate is among office properties at 16.7 percent.  The rate is expected to decline to 15.7 percent over the next two years with rents increasing 2.0 percent this year, 2.5 percent in 2013, and 2.8 percent in 2014.

Retail vacancies are at 10.8 percent and are expected to drop by 0.1 percent next year and reach 10.1 percent by the end of 2014.  Rents are expected to increase 0.8 percent this year, 1.4 percent next year and then 2.0 percent.  The vacancy rate in the industrial sector is 10.1 percent projected at 9.7 percent in 2013 and 9.4 percent in 2014.  Rent will increase 1.7 percent this year, and 2.2 percent and 2.6 percent in the following two periods.

Lawrence Yun, NAR chief economist, said the market has been slowly building momentum.  "Job creation is the key to increasing demand in the commercial real estate sectors," he said.  "The economy is expected to grow 2.5 percent next year, and with modest job creation, assuming there is no fiscal cliff, the demand for commercial space will gradually rise.  The greatest friction that remains is a tight credit environment, notably for smaller properties."

"The primary factor holding back greater job creation has been uncertainty over regulations and associated costs," Yun said.  "With the elections behind us and Washington apparently resolved to prevent a fiscal cliff, it's hoped that ambiguity over regulatory issues will clear relatively soon so employers can understand the rules of the game and the layout of the field."