Economy Watch: Realtors Predict a Solid Year for CRE

The U.S. real estate industry should have a "steady" 2017, with lower vacancy rates in several commercial real estate sectors, according NAR's latest outlook report.
Source: National Association of REALTORS® Commercial Real Estate Outlook 1Q 2017
Source: National Association of REALTORS® Commercial Real Estate Outlook 1Q 2017

The National Association of Realtors expects U.S. CRE to have a “steady” 2017, according to its first-quarter outlook report, which the organization released on Friday. The market will neither see boom nor bust, in other words.

Vacancies rates are one metric that NAR posits will change a bit this year compared with 2016. National office vacancy rates, for instance, are likely to retreat 1.1 percentage points to 12.1 percent during the year, as job growth in business and professional services brings increased need for office space.

The vacancy rate for industrial space is expected to decline 1.3 percentage points to 7.1 percent, and retail availability will decrease 0.7 percentage points to 11.2 percent. Only the multifamily sector is predicted to have little change in vacancy rate over the next year, as new apartment completions keep vacancies at an average of 6.5 percent.

Even so, apartment rents will likely maintain their solid growth in most of the country, NAR predicted. Especially in the most expensive metro areas, higher home prices and mortgage rates will put the squeeze on many renters who might otherwise want to buy a place to live, forcing them to sign a lease for at least another year, said NAR Chief Economist Lawrence Yun.

As for the investment market, commercial property prices–especially for Class A assets in larger markets–surpassed pre-recession levels last year because of aggressive bidding and lower inventory levels, Yun noted. However, with the Federal Reserve expected to raise short-term rates three times in 2017, a minor price correction may be in store this year as cap rates move higher.