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REALTOR® Commercial Markets Post Solid Growth in Second Quarter

The second quarter marked a noticeable improvement in the recovery trajectory of commercial REALTOR® markets.  Based on the results of the July Commercial Real Estate Market Survey, commercial practitioners reported solid leasing activity and a double digit rise in sales volume.  Nationally, 60 percent of REALTORS® reported completing a sales transaction during the quarter.

On a year-over-year basis, sales increased 12.2 percent in the second quarter, as prices rose 2.3 percent.  Cap rates declined 50 basis points, from an average of 9.2 percent in the first quarter to 8.7 percent in the second. Multifamily properties recorded the lowest average cap rates, at 7.5 percent, followed by industrial spaces, at 8.2 percent.  Office and retail spaces posted cap rates of 8.3 percent and 8.5 percent, respectively.

The average transaction price moved from $1.1 million to $1.0 million in the second quarter. Commercial practitioners continued to find financing as the top obstacle in closing deals, followed closely by price disagreements between buyers and sellers.  Tight inventory remains a concern for one in five practitioners.  In keeping with the upward momentum in the markets, REALTORS® rated the direction of commercial business opportunities 6.0 percent higher compared with the first quarter, in the wake of a 4.0 percent rise from the fourth quarter of last year.

Leasing was also moving steadily upwards, at a pace 5.0 percent higher over the previous quarter, pointing to a steadily rising demand.  On the supply side, new construction finally showed signs of life, increasing 4.0 percent over the first quarter.  Vacancies declined for all property types, except industrial and hotel properties.  Office vacancies declined 7 basis points, to 16.9 percent, while retail availability declined 140 basis points, to 14.6 percent.  Multifamily vacancy was 5.7 percent.

With sliding vacancies, landlords find fewer reasons to provide rent concessions.  In addition, rental rates rose 2.0 percent during the second quarter.  In terms of space requirements, tenant demand remained strongest in the 5,000 square feet and below, accounting for 70.0 percent of leased properties.  Lease terms remained steady, with 36-month and 60-month leases capturing the bulk of the market.

For the full report along with respondent comments, please visit http://www.realtor.org/reports/commercial-real-estate-market-survey.

George Ratiu, Director, Quantitative and Commercial Research

George Ratiu, Research Economist, writes regular economic columns and conducts research in the areas of commercial real estate, international investments, mortgage performance and foreclosures. He produces NAR’s Commercial Real Estate Outlook and manages quantitative surveys, including the Commercial Real Estate Quarterly Market Survey.

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