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NAR shows commercial real estate improving

WASHINGTON -- The outlook for all of the major commercial real estate sectors is slightly improving, despite disappointing economic growth during 2014's first quarter, according to the National Association of Realtors quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, said the sluggish growth experienced in the first quarter is not indicative of the economy's actual health.

"Gross domestic product should expand closer to 3 percent for the remainder of the year,” Yun said. “The improved lending for commercial loans and continuing job gains we've seen this spring bode well for modest progress in commercial real estate leases and purchases of properties."

However, Yun cautioned that with rising long-term interest rates on the horizon, consistent economic growth is imperative to solid commercial real estate investment in the years ahead.

National vacancy rates in the office market are forecast to decline 0.2 percentage point over the coming year, while international trade gains continue to boost use for industrial space, which forecasts a decline of 0.3 point.

The outlook for personal income and consumer spending is favorable for the retail market, likely leading to a vacancy decline of 0.2 percent.

"The multifamily sector continues to be the top-performer in commercial real estate with the lowest vacancy rates,” Yun said. “However, tight availability -- despite new construction -- is causing rents to currently rise near 4 percent annually in many markets. Many renters who are getting squeezed may begin to view homeownership as a more favorable, long-term option."

Multifamily housing should see vacancy rates edge up from 4 percent in the second quarter to 4.1 percent in the second quarter of 2015, with added supply helping to meet growing demand.

Vacancy rates below 5 percent are generally considered a landlord's market, with demand justifying higher rent.

San Diego is among the areas with the lowest multifamily vacancy rates at 2.5 percent, behind only New Haven, Conn., at 2.3 percent and Ventura County, Calif., 2.4 percent.

New York City; Hartford, Conn.; and Oakland-East Bay, Calif. are also at a 2.5 percent vacancy rate.

Average apartment rents are projected to rise 4 percent this year and in 2015. Multifamily net absorption is expected to total 221,400 units in 2014 and 173,100 next year.

Office vacancy rates should decline from an expected 15.8 percent in the second quarter of this year to 15.6 percent in the second quarter of 2015.

Office rents are projected to increase 2.5 percent in 2014 and 3.2 percent next year.

Net absorption of office space in the United States -- which includes the leasing of new space coming on the market, as well as space in existing properties -- is likely to total 39.7 million square feet this year and 49.8 million in 2015.

Industrial vacancy rates are anticipated to fall from 9 percent in the second quarter to 8.7 percent in the second quarter of 2015.

Annual industrial rents should rise 2.4 percent this year and 2.6 percent in 2015.

Net absorption of industrial space nationally is seen at 107.8 million square feet in 2014 and 107.1 million next year.

Vacancy rates in the retail market are expected to decline from 10 percent now to 9.8 percent in 2015's second quarter.

Average retail rents are forecast to rise 2 percent in 2014 and 2.3 percent next year. Net absorption of retail space is likely to total 11.5 million square feet this year and 19.6 million in 2015.

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