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Commercial Fundamentals Notch Steady Gain In Third Quarter 2013

While we are still grappling with the delays from October’s government shutdown, the estimates for third quarter economic output show much of the same. Gross domestic product rose at an annual rate of 2.9 percent in the third quarter, on the heels of a 2.5 percent rise in the second quarter. While the acceleration in the economic pace is welcome, most of it was boosted by inventory adjustment.

All main GDP components—consumers, businesses, government and trade—were positive contributors to third quarter growth. Consumer spending gained 1.5 percent, driven by a 4.3 percent rise in consumption of goods. Businesses approached investments with a cautious outlook in the third quarter, as the specter of budget wrangling in Washington and the possibility of a government shutdown loomed large. Nonresidential fixed investments rose at an annual rate of 1.6 percent. Business spending on buildings jumped 12.3 percent in the third quarter, on the heels of a 17.6 percent gain during the second quarter. The noticeable advances point to a strengthening pipeline of commercial developments, as market fundamentals continue to improve.

The past few quarters have witnessed a broad slowdown in global economies’ rates of growth. Against this trend, the U.S. economy posted a positive trade balance in the third quarter. The increase in international trade provides for continued strengthening in industrial sector fundamentals, with warehouses seeing marked results.

Government spending posted a modest increase in the third quarter, as spending at state and local government levels rose after years of cutbacks. With stronger balance sheets, state and local governments increased their spending by an annual rate of 1.5 percent. Federal government spending continued declining, as the process of “sequestration” marched on, posting a 1.7 percent slide in the third quarter.

The outlook for the last quarter of 2013 does not bear much glee. With the knowledge of the government shutdown in the rearview mirror, and a retail season already eyeing steep discounts, the GDP outlook for all of 2013 projects an annual growth rate of only 1.7 percent.

Net absorption of office space is projected to total 32.2 million square feet by year end. Office vacancies are expected to decline to 15.7 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 9.8 percent, 9.9 percent and 12.0 percent, respectively. Rents for office properties are expected to increase 2.4 percent over the year.

Industrial markets contend with demand for warehouse space. Net absorption of industrial space is projected to total 97.0 million square feet by the end of 2013, driving vacancy rates to 9.3 percent. The metro areas with the lowest industrial vacancy rates are Orange County, at 3.9 percent, followed by Los Angeles with 4.0 percent, and Miami, at 6.0 percent. Rents for industrial buildings are expected to grow 2.4 percent this year.

Consumers opened their wallets in the third quarter, propping demand for retail spaces. Net absorption of retail buildings is expected to total 10.5 million square feet this year, accompanied by a vacancy rate of 10.5 percent by year-end. Markets with the lowest retail vacancy rates are led by Fairfield County, CT, at 3.9 percent. Rounding the top three are San Francisco, at 4.0 percent, and Long Island, NY, at 5.2 percent. Rent for retail properties are projected to increase 1.4 percent over the year.

The apartment market is on track to close the year on a strong note. Net absorption is expected to total 239,443 units this year. Against a supply of only 123,518 new units, vacancy rates are estimated to reach 4.1 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. Following closely behind are Minneapolis and San Diego, both at 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, 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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