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Commercial Fundamentals Point to Steady Growth In Second Half of 2013

After gross domestic product revisions, business spending shows growing confidence in the first half of the year. The first quarter spending was down 4.6 percent, with a decline driven by a 25.7 percent drop in spending on commercial structures. However, the second quarter posted a much better performance, with an annual growth rate of 4.6 percent. Spending on commercial buildings rose 6.8 percent. Businesses also increased their spending on information processing and transportation equipment by 11.4 percent and 5.5 percent, respectively. The new component of business spending—intellectual property products—rose 3.9 percent in the second quarter, boosted by software and R&D.

Despite slowing global economies, international trade remained brisk. Exports rose 5.4 percent in the second quarter, after a 1.3 percent decline in the first quarter. Imports increased 9.5 percent in the second quarter, leading to a widening balance of trade.

The looming costs and uncertainty of the coming Patient Protection and Affordable Care Act are certainly keeping businesses cautious. The uncertainty is illustrated in the employment numbers. Payroll employment in the second quarter gained 563,000 jobs, a lower figure than the first quarter’s 622,000. July’s employment figure of 162,000 disappointed expectations and indicated a slowdown in hiring during the first month of the third quarter. On the flip side, employment remained positive and the economy is making progress toward closing the post-recession gap. The unemployment rate declined from 7.7 percent in the first quarter to 7.6 percent in the second, and then to 7.4 in July. However, part of the decline is attributable to a lowering of the labor force participation rate.

The outlook for the remainder of 2013 is for GDP to grow at a 1.6 percent annual rate. Payroll employment is expected to rise 1.5 percent, leading to a net 2.4 million new jobs for the year.

With a steady economy, commercial fundamentals show moderate growth in the third quarter. Vacancy rates continue tightening, accompanied by rising rents. National vacancy rates over the coming year are expected to continue declining.

Net absorption of office space is projected to total 30.0 million square feet by year end. Office vacancies are expected to decline to 15.6 percent by the end of 2013. The markets with the lowest forecasted office vacancy rates are Washington, D.C., New York and Little Rock, with availability rates of 9.7 percent, 9.8 percent and 12.1 percent, respectively. Rents for office properties are expected to increase 2.5 percent over the year.

Industrial markets are still finding favorable demand for warehouse space. Net absorption of industrial space is projected to total 102.0 million square feet by the end of 2013, driving vacancy rates to 9.2 percent. The metro areas with the lowest industrial vacancy rates are Orange County, at 3.8 percent, followed by Los Angeles with 4.0 percent, and Miami, at 5.9 percent. Rents for industrial buildings are expected to grow 2.4 percent this year.

Consumers remained steadfast in first half 2013 spending, boosting demand for retail spaces. Net absorption of retail buildings is expected to total 11.8 million square feet this year. With the supply of new buildings still constrained, vacancies are expected to drop to 10.4 by year-end. Markets with the lowest retail vacancy rates are led by San Francisco, at 3.9 percent. Rounding the top three are Fairfield County, CT, at 4.1 percent, and Long Island, NY, at 5.0 percent. Rent for retail properties are projected to increase 1.5 percent over the year.

The apartment market maintained a strong demand and low vacancies. However, competition from residential rentals and new supply is adding pressures on vacancies. Net absorption is expected to total 266,650 units this year. Against a supply of only 141,200 new units, vacancy rates are estimated to reach 3.9 percent by the end of 2013. Metro areas with the lowest vacancy rates are New Haven, CT, at 1.9 percent and Syracuse, NY, at 2.0 percent. Sharing the number three spot, New York City and San Diego, each record 2.1 percent. Apartment rents are projected to increase 4.0 percent in 2013.

For the full Commercial Real Estate Outlook report, visit http://www.realtor.org/reports/commercial-real-estate-outlook.

George Ratiu, Research Economist

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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