We’ve closed the pages on 2012 and are looking forward to an even better 2013. In fact, we see the commercial real estate market in the Northeastern U.S. continuing its steady upward momentum this year as vacancies continue to decline and rents rise across all segments of the commercial real estate market — especially for retail and multifamily assets. Vacancy rates over the next four quarters are forecast to decline:
- 1.0% in the office market (to 15.7% in Q4 2013)
- 0.6% in the industrial market (to 9.5% in Q4 2013)
- 0.2% in the retail market (to 10.6% in Q4 2013)
- 0.1% in the multifamily market (to 3.9% in Q4 2013)
The multifamily market is showing the tightest availability and is experiencing the strongest rent increases, well above the rate of inflation. Vacancy rates below 5% are considered a landlord’s market with demand justifying higher rents. That may well play out in 2013.
Most of the major real estate submarkets across the Northeastern U.S. are showing improving fundamentals, and, in fact, the multifamily market is already nearly fully recovered. Unpinning this trend is job creation, the key to increasing demand across all investment real estate asset classes. With the economy expected to grow 2.5% next year and modest job creation to continue, the demand for commercial space will gradually rise. The greatest hindrance to more robust market growth is tight credit, especially for smaller properties, as well as uncertainty over regulations and their associated costs.
The Northeast is showing particular strength in the retail markets, with Fairfield County matching San Francisco, CA, with the lowest vacancy rate of 3.9%. Long Island, NY, ranks third, with 5.1%. The average retail rent should increase 1.4% in 2013, while net absorption of retail space (the leasing of new space coming on the market and space in existing properties) is estimated to be 19.8 million square feet in 2013.
In the multifamily market, the lowest multifamily vacancy rates currently are Portland, OR, at 2.1%; New York City at 2.2%; and Minneapolis at 2.3%. The average apartment rent should increase 4.6% in 2013, and multifamily net absorption is likely to be 234,600 units in 2013.
In the office market, New York City ranks second nationally in lowest vacancy rates with 10.1%. Office rent is expected to increase 2.5% in 2013, and the net absorption of office space in the U.S. is likely to reach 49.0 million square feet in 2013.
Annual industrial rent is forecast to rise 2.2% next year, with net absorption of industrial space nationally totaling 89.6 million square feet in 2013.
Looking at the year ahead, we see new occupancy and rent growth picking up steadily, operating incomes looking better and property values firming up. This is good news after a recession that hammered office, industrial and retail space and put downward pressure on commercial rents. With that lower revenue, landlords suffered and new construction practically dried up. Even developers brave enough to build for future demand in this scenario were hampered by the highly reluctant, extremely risk-adverse lending environment. Traditionally, the best mortgage rates have been obtained on excellent properties, which means good tenants and good cash flow. We will see more of that combination in 2013.
With offices in New York, Connecticut and Massachusetts, our investment sales teams are well positioned to support multifamily and commercial investors from New York to Boston. If you’re a property owner or an investor in the mid-market segment and want to discuss your investment goals and how we can help you achieve them, please give us a call. We wish you a healthy, happy and prosperous New Year!