Multi-Family Only CRE Sector to See Improvement in Vacancies Before 2011

While occupancy levels in the office, industrial and retail sectors are forecasted to continue to decline this year and into 2011, the picture is rosier for the multifamily sector, where occupancy levels are expected to rise.

May 27, 2010
By Barbra Murray, Contributing Editor

Photo of Lawrence Yun courtesy Flickr Creative Commons user tboard

In terms of vacancy rates, the worst is not quite over for the commercial real estate sector, according to the National Association of Realtors’ Commercial Real Estate Outlook report. But there is some good news. While occupancy levels in the office, industrial and retail sectors are forecast to continue to decline this year and into 2011, the picture is rosier for the multi-family sector, where occupancy levels are expected to rise.

Although the national economy is rebounding, the office, industrial and retail sectors are still feeling the burn of the downturn, and the impact remains most evident when observing the amount of space that continues to collect cobwebs.

Per numbers from NAR’s study, the office market is presently in the worst shape, and is projected to experience a more pronounced decline over the next several months. NAR predicts that the office market vacancy rate will jump from a first quarter 2010 figure of 16.9 percent to 17.6 percent in the first quarter of 2011, with signs of relief forecast to appear later in 2011.

In the industrial sector, where leasing activity has dropped below historical levels, the average vacancy rate is on track to increase, but not by as large a margin as is anticipated for the office sector. Vacancies will rise from a first quarter rate of 14.3 percent to 14.8 percent in the first quarter of next year. However, the rate will likely fall, slowly, during the remainder of 2011.

As for the retail sector, the vacancy rate will experience a less pronounced year-over-year increase, with the rate expected to go from 12.6 percent to 12.8 percent. Unlike the industrial and office sectors, retail’s average vacancy rate will not continue to climb during 2011; it is expected to hold steady.

For office, industrial and retail properties, 2011 will begin higher vacancy rates, but a turning point is in sight for later in the year. “These sectors should see gradual improvement after jobs pick up and create additional demand for space, meaning a broader improvement in commercial real estate is likely in 2011,” Lawrence Yun, NAR chief economist, noted in a prepared statement on the report.

While substantial improvement in the office, industrial and retail markets is not in the cards for 2010, it is already palpable in the multi-family market. As per NAR’s report, the average vacancy rate for apartment properties is on track to drop an entire percentage point from 7.3 percent in the first quarter of 2010 to 6.3 percent in the first quarter of 2011, marking the only anticipated drop in vacancies among the four surveyed sectors. “The multi-family sector,” Yun remarked, “can expect increased demand as the economy creates jobs and new households are formed, likely in the second half of this year.” There’s always an exception; multi-family is breaking the cycle of decline among the sectors.