According to a new report from CBRE, the U.S. commercial real estate market showed improvement across all property sectors in the second quarter (Q2) of 2012, defying concerns about the pace of economic recovery and lukewarm employment growth.
Key Report Highlights:
Vacancy in the nation's office buildings dropped to its lowest level since 2009, falling 30 basis points (bps) during Q2 to 15.7%.
National industrial availability1 dropped 20 bps during Q2 to 13.2%, continuing two years of improvement.
Retail properties, which have generally lagged other property sectors during the recovery, saw a slight improvement in availability, which fell to 13.0% during Q2.
The nation's apartment buildings extended a spirited recovery as vacancy decreased 60 bps from a year ago to 4.8%.
"The commercial real estate recovery remained intact in the second quarter, despite growing worries about the global economy," said Jon Southard, Managing Director, CBRE. "With construction well below typical levels in a recovery, any and all improvements in demand get channeled into a lower vacancy rate."
The national office vacancy rate fell by 30 bps to 15.7% in Q2 2012 marking the first quarter since 2009 in which the vacancy rate has been below 16%.
The national suburban vacancy rate fell by 40 bps while the national downtown vacancy rate fell by 20 bps. Occupancy improved in almost two-thirds of markets nationwide. Vacancy rates fell by 100 bps or more in seven markets: Albuquerque, Boston, Charlotte, Norfolk, Richmond, San Diego and Seattle. Technology and energy driven markets continued to be among the top performers as vacancy rates in San Francisco, Houston, Seattle and San Jose fell by 50 bps or more in the second quarter and remain well below their year-ago vacancy rates.
"At 15.7%, the national vacancy rate is still well above its pre-recessionary low of 12.4% and the recent headwinds facing the office markets have not gone away," added Mr. Southard. "However office fundamentals have been helped by record low construction levels and deep rental discounts driving leasing volume, but more support is needed from the job market for stronger absorption in the second half of 2012 and 2013."
Q2 2012, with an availability rate of 13.2%, is now the eighth consecutive quarter in which industrial availability has declined. During the quarter, 34 markets reported falling availability rates, 18 reported increases, and eight reported no change.
Among large markets, Indianapolis (-130 bps), Memphis (-120 bps), Detroit (-100) and Seattle (-60bps) all saw significant drops. Chicago and Riverside were both down by 50 bps while, Los Angeles, the nation's second largest market after Chicago, reported a decrease of 20 bps. With most markets reporting improvement in availability rates, it appears that slowing but continuing economic growth, is still leading to increased demand for industrial space.
The retail availability rate declined slightly to 13.0% in Q2 2012, down 10 bps compared to the previous quarter and down 20 bps compared to the rate one year ago. Absorption levels were well above the low square footage of new space completed in the second quarter, enabling availability rates to improve.
A majority of the retail markets recorded either flat or declining availability rates compared to Q1 2012. Notable performers included Bakersfield, Cincinnati, Columbus, Cleveland, Providence and San Diego; each of these markets recorded a decline of at or above 70 bps. On the other end of the spectrum, markets such as Jacksonville, Nashville and Richmond recorded gains in availability rates of at or over 70 bps in the second quarter. Most markets are still hovering at or above their Q2 2011 availability rates.
Compared to a year ago, vacancy rates declined in 52 markets, with the biggest year-over-year declines in vacancy (150 bps or more) in Fort Worth, Houston, Cincinnati, Birmingham, Salt Lake City, Hartford, and Orlando. Markets with the lowest vacancy rates (3.5% or lower) included Newark, Pittsburgh, Minneapolis, San Jose, Hartford, Boston, Miami, Providence, Oakland, Ventura, San Francisco, and Salt Lake City. With the continuing gains in occupancy, effective rent growth will remain strong and apartment fundamentals should continue improving in 2012 as the economy takes additional steps toward recovery.