The commercial real estate market – particularly the office and industrial sectors – is showing encouraging signs of recovery, according to midyear data compiled by CoStar Group.
CoStar Group reports that the net absorption of office space totaled 16 million square feet in the second quarter of this year, exceeding the historical average of 11 million square feet per quarter. The industrial market absorbed 35 million square feet of space in the second quarter, exceeding the historical average of 21 million square feet per quarter. Both the office and industrial figures represent a more than 50% increase from the first quarter of this year.
CoStar Group adds that the decline in the national office vacancy rate to 12.8% – along with the prospect of future vacancy declines – suggests that the scales are tipping toward generating office rent growth. So far, however, the growth has been at a 1.4% annual rate as of the end of the second quarter. The 50 million square feet of office space currently under construction is roughly half the historical average, and construction is expected to remain below average, largely due to depressed office rents. CoStar estimates that nationally, office rents are 7% below the level that would normally entice developers to justify new construction.
In contrast, the retail sector grew by 3 million square feet of net absorption by the close of the second quarter – the lowest level since the recession in 2009 and far below the historical average of 21 million square feet per quarter.
Vacancy rates fell year-over-year for all of the major property sectors, which CoStar Group attributes in part to relatively low levels of net completions. Specifically, industrial vacancy is down 70 basis points (bps) to 9.3%, office vacancy is down 60 bps to 12.8%, and retail vacancy is down 30 bps to 7%.