We all know the main commercial real estate sectors: retail, multifamily, office, industrial, hotel. But do you know how they’re performing in terms of rent, absorption, vacancy, etc? In the second half of 2016, multifamily and office stood out from the rest.
It’s worth taking a closer look at these two sectors so brokers, lenders, owners, developers, buyer, sellers and managers can know what to expect as we head into 2017.
OfficeThe office sector is performing well across four key metrics—rental rates, net absorption, vacancy and construction. Data from Jones Lang LaSalle (JLL) offers more insight on rents across the country:
- San Francisco has the highest rents in the country: $73.05 per square foot
- Detroit has the lowest: $18.32
- Most metro areas (Denver, Portland, Orange County, Boston, Seattle) fall in the $25-$40 range but are growing fast
And with the second quarter of 2016 seeing a national rent increase of 1%, pricing should continue to rise. According to the research department at Ten-X, an online platform for conducting CRE transactions, effective rents are up 3.5% from 2015 and are approaching pre-recession levels.
In terms of absorption, net numbers reveal 21.4 million square feet halfway through the year. Leading the pack are Phoenix, Dallas and Silicon Valley. Chicago is also expanding, seeing 2,329,917 square feet of net absorption. On the other end is New York City, with a negative absorption of -1,292,252 square feet. At Ten-X, projections call for 49 million square feet of absorption in 2016, exceeding 2015’s absorption of 45 million square feet.
Vacancy rates continued their decline, hitting 14.6% nationally and nearing their pre-financial crisis peak. The lowest vacancy rates across the country are:
- Nashville - 5.2%
- Salt Lake City - 8.0%
- San Francisco - 8.0%
- Portland - 8.8%
- Seattle - 8.8%
At Ten-X, researchers expect the vacancy numbers to move higher, reaching 16.9% in 2019.
On the construction front, JLL estimates that the national roster of projects consists of just over 100 million square feet marked for delivery to the marketplace over the next 36 months. According to JLL, “65% of the total pipeline is in just 10 markets.” New York and Dallas lead the way with 12.2 million and 11.1 million square feet respectively.
Multifamily continues to see rapid growth. Of the total $111 billion in commercial real estate volume nationally, multifamily accounted for $38.6 billion of sales, according to the National Association of Realtors (NAR). NAR also indicates that pricing for multifamily expanded by 11.2% while cap rate compression continued to accelerate, averaging 6.9% nationally and 5.7% in the larger commercial markets.
According to Ten-X, the strongest markets are Orlando, Phoenix, Atlanta, Fort Lauderdale and Las Vegas. Effective rents are up 4.5% from 2015, another all-time high.
There is no shortage of demand for housing in the market, with 42.9 million units occupied in the first half of 2016. The national vacancy rates clocked in at just below 7.9%, while the average rent was $870.
Ten-X data confirms the solid growth in the multifamily space across Class A, B and C properties.
A note on the up-and-comers
New niche markets are also popping up, including: “timber, data centers, document storage facilities, cell towers, prisons and billboards.”
The rise of the creative office is another interesting development. This open space concept (popular among millennials) is changing the way workers interact, with multiple tenants sharing a space. This trend is also precipitating the decline of closed spaces, offices and segmented departments.