Vacancy rates are beginning to level, rents are depressed and subleasing space is high, according to The Society of Industrial and Office Realtors (SIOR), in its Commercial Real Estate Index.
The index rose 2.8 percentage points to 41.0 in the second quarter, but remains well below a balanced marketplace, according to the National Association of Realtors. The last time the commercial market was at equilibrium occurred in the third quarter of 2007.
The National Association of Realtors said that commercial real estate sectors, hurt by weak job growth, are offering incentives in many areas that are conducive to business expansion.
“Vacancy rates are beginning to level off in some sectors, but rent discounts and moderate levels of landlord concessions are widespread. This is very much a tenant’s market, which is quite favorable for businesses that are considering expansion. It’s also encouraging that there is a modest improvement in the sentiment of commercial real estate practitioners,” said Lawrence Yun, NAR chief economist.
With elevated vacancies, the NAR said that commercial real estate development remains “stagnant” in all regions. The NAR said it expected the office vacancy rate to increase to 17.0% in the second quarter of 2023 from 16.7% in the latest period. Apartment rental buildings will likely see another decline in the vacancy rate to 5.6% next year from 6.0% in the most recent quarter.
Office Markets
Vacancy rates in the office sector are expected to increase from 16.7% in the second quarter of this year to 17.0% in the second quarter of 2023. The markets with the lowest office vacancy rates in the second quarter were New York City, Honolulu and Long Island, N.Y., with vacancies around the 9 to 11% range. Annual office rent should fall 2.7% this year and decline another 2.1% in 2023.
Industrial Markets
Industrial vacancy rates are likely to decline from 14.1% in the second quarter of 2022 to 13.7% in the second quarter of 2023. The areas with the lowest industrial vacancy rates in the second quarter were Los Angeles, San Francisco and Kansas City, with vacancies ranging between 8 and 11%. Annual industrial rent is estimated to drop 5.4% this year, and to decline another 4.7% in 2023.
Retail Markets
Retail vacancy rates should hold steady at 13.1% in both the second quarter of this year and in the second quarter of 2023, with a level pattern for most of next year. Markets with the lowest retail vacancy rates in the second quarter include San Francisco, Honolulu and Miami, with vacancies of 7 to 8%.
Multifamily Markets
Multifamily vacancy rates are likely to decline from 6.0% in the second quarter of this year to 5.6% in the second quarter of 2023. Areas with the lowest multifamily vacancy rates in the second quarter include San Jose, Calif.; Pittsburgh and Philadelphia, with vacancies of less than 4%.