Global Doldrums Could Reach US in 2015: NAR

WASHINGTON, DC—A slowdown in economic growth globally isn't breaking the stride of the US economy or commercial real estate, the National Association of Realtors said Monday, predicting that the momentum will carry forth into the new year. However, NAR's quarterly forecast hints at a potential drag on US growth as overseas markets weaken.

“GDP growth in the fourth quarter will be sluggish at around 2% behind stalling exports,” says Lawrence Yun, NAR's chief economist. “Although GDP will likely climb to near 3% in 2015, the current pace of job growth could slow and ultimately impact commercial real estate activity if sluggishness in the global economy persists.”

It was increased export activity, along with government spending turning positive, that drove third-quarter GDP growth, says NAR. US exports rose 7.8% in Q3 after a double-digit annual rate of growth in Q2, while import volume dipped by 1.8%.

Government spending rose at a 4.6% annual rate during Q3, led by increased federal spending and particularly increased defense spending, which rose 15.9% during the quarter. Consumer spending also rose, albeit more modestly, as did business spending. All in all, according to the NAR report, “The economic picture was positive across most major indices” during Q3.

This goes to prove, Yun says, that “the second quarter wasn't an anomaly, as business spending increased, commercial construction rose and the labor market continued to make positive strides. Job growth is the catalyst to improved demand for commercial real estate leasing and new construction projects.”

NAR say national office vacancy rates are forecast to decrease 0.5% over the coming year to 15.7%, thanks to job growth exceeding inventory coming onto the market. On a more localized basis, though, the numbers continue to vary quite widely.

Metropolitan Washington, DC is expected to end 2014 with a 9.3% office vacancy rate, while the New York City metro area is projected to finish the year with 9.6% vacancy, according to data from NAR and research firm Reis Inc. Those are the only markets with vacancies below 10% among seven dozen listed in NAR's report; double-digit vacancy rates projected for Q4 elsewhere in the US exceed 25% in the cases of Detroit, Las Vegas, Phoenix and Dayton, OH. Rents in the sector are projected to increase nationally by 2.4% this year and 3.3% in '15.

NAR says that improved manufacturing activity should lead to a declining vacancy rate for industrial space, going from 8.8% at the end of this year to 8.4% 12 months from now. Currently, Orange County, CA and Los Angeles are the occupancy kings with industrial vacancies of 3.6% and 3.7%, respectively. Annual industrial rents should rise 2.4% this year and 2.9% next year.

Vacancy rates in the retail market are expected to decline from 9.7% at year's end to 9.5% 12 months hence. Average retail rents are expected to see the smallest increases among the major sectors: 2.0% in '14 and 2.5% next year. Net absorption of retail space is likely to total 11.4 million square feet for this year and, buoyed by increases in consumer spending, jump by more than 50% to 18.9 million square feet over the next 12 months.

Average apartment rents are projected to rise 4.0% this year and 4.1% in 2015. Multifamily net absorption is expected to total 216,300 units in 2014 and 171,200 next year. “Low housing inventory and the sizeable demand for rentals will continue to spur multifamily construction as well as keep rents rising above inflation through next year,” says Yun. That being said, the pace of construction will mean a slight uptick in the multifamily vacancy rate to 4.3% by the end of '15.