LOS ANGELES—Evidence continues to roll in that although thedomestic economy still has its share of weaknesses, US commercialreal estate is powering ahead. CBRE Group reportedMonday that the third quarter saw across-the-board strengthening,with office in particular making its strongest showing in eightyears.

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“The real estate recovery clearly gained in strength in thethird quarter as all property types saw notably improved demandtrends,” says Jon Southard, managing director ofCBRE's Econometric Advisors group. “Especially important, officetenants showed greater confidence in expanding their footprint andfinally appear to be shaking off the lingering effects of therecession.” Q3's office vacancy decline of 40 basis points to 14.1%was the steepest quarterly drop since Q2 2006, while industrialavailability declined 20 bps from the previous quarter, as did thatof retail.

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A report last week from Cassidy Turley alsocharted the quarterly progress that office made in Q3. The 80 USoffice markets tracked by the firm absorbed 20.5 million squarefeet during the quarter, an increase of 20% from Q2 and a 38% riseyear over year. Kevin Thorpe, chief economist withWashington, DC-based Cassidy Turley, makes the linkage betweenstronger employment trends and tightening officesupply.

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“The single most important factor for the office sector isemployment,” says Thorpe. “Businesses have been creating well over200,000 net new jobs per month for several months now, the higheststretch of job creation in almost 15 years. About 30% of those newjobs require office space, so this clearly creates a strongereconomic backdrop for the office sector.”

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Southard concurs, noting that 2014 is on pace to be the bestyear for office since the recovery began. “While a low-supplyenvironment has aided the office recovery in the last four years,growing payrolls at office-using firms is now catalyzing strongabsorption in some markets,“ he says. “We believe the nationaloffice market to be in a 'sweet spot' with declining vacancies asconstruction remains relatively low and payrolls at office-usingfirms continuing to grow and reach new peaks.”

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Likewise, industrial is maintaining its momentum, although thedecreases in availability were smaller during Q3 than in some priorquarters. “The nation's industrial sector continues to impress asthe economic expansion has been especially robust in the sectorsthat affect demand for industrial space,“ Southard says. “Weforesee ongoing strength in the industrial market as conditionsremain encouraging for further growth.” The sector ended Q3 with anavailability of 10.6%.

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Although retail was slower out of the starting gate in therecovery, CBRE notes that Q3's retail availability rate of 11.5%was down 70 bps Y-O-Y and now stands 170 bps below thepost-recession peak of 13.2%. Lower availability should spur rentgrowth in coming quarters, according to CBRE.

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As occupancy fundamentals continue to improve, so does anothermetric—pricing. Green Street Advisors said Mondaythat its Commercial Property Price Index increased by 1% inSeptember. With property appreciation accelerating recently, valuesin institutional-quality assets are now above 2007 highs in everymajor property sector.

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“Cap rates continue to move lower as investors look for return”says Peter Rothemund, an analyst with NewportBeach, CA-based Green Street. “That trend has legs. Real estatevalues are higher than they were at the start of the year, butvaluations remain favorable when they're compared to the otherplaces investors can put their money in this low-return world.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.