National Association of REALTORS

COMMERCIAL REAL ESTATE

OUTLOOK: 2015.Q2

COMMERCIAL REAL ESTATE

OUTLOOK

Economic Momentum Slips in First Quarter

George Ratiu
Director, Quantitative &
Commercial Research

Economic activity lost momentum during the

first quarter 2015, with the second estimate
from the Bureau of Economic Analysis
placing real gross domestic product (GDP)
at $16.3 trillion, a negative 0.75 percent
annual rate of growth. All major GDP
components, except personal consumption,
declined during the quarter.
Business investments decreased at an
annual rate of 2.8 percent, as commercial
real estate construction felt the brunt of the
prolonged winter weather in a large swath of
the country. Investment in structures
dropped at an annual rate of 20.8 percent in
the first quarter, totaling $440.8 billion.
Business spending on equipment rose at an
annual rate of 2.7 percent, aided by a 15.8
percent advance in transportation
equipment. Companies increased
investments in intellectual property products
by 3.6 percent, driven by spending on
software.
In line with the weather, manufacturing
activity slowed in the first quarter. Based on
the Census Bureaus advance report,
manufacturers new orders of durable goods
declined at an annual rate of 3.3 percent,
while orders for capital goods slid 3.2
percent. Shipments of manufactured
durable goods posted a 1.1 percent decline
on an annual basis, while those for capital
goods decreased at a 2.0 percent rate.
Manufacturers inventories for durable
goods rose at a 2.5 percent and for capital
goods at 0.8 percent annual rate.
International trade activity continued at a
slower pace in the first quarter. However, as
the dollars value continued strengthening
against most currencies, the trade deficit
widened, with the 7.2 percent decline in
exports outmatching the 1.8 percent annual
growth rate in imports.

Net exports of goods and services totaled a

negative $202.8 billion in the first quarter of
the year.
GDP (% Annual Chg)
4.6

5.0
3.0
2.3

2.2

-0.8
-2.1

Source: NAR, BEA

Government spending totaled $2.9 trillion

adjusted for inflation, in the first quarter, a
1.1 percent decline in annual terms.
Spending at the federal level was flat,
posting a slight 0.1 percent rise, boosted by
nondefense spending. State and local
governments cut back on spending at an
annual rate of 1.8 percent.
Consumer spending was the relatively
upbeat spot in the GDP figures for the first
quarter. Real personal consumption
expenditures totaled $11.2 trillion, a 1.8
percent increase on an annual basis.
Spending on services outpaced
consumption of goods during the period,
rising at a 2.5 percent annual rate.
Consumers upped their household
expenditures across all subcategories.

COMMERCIAL REAL ESTATE

OUTLOOK

Spending on housing and utilities rose 4.7 percent, while

health care increased 5.3 percent. Spending on
transportation rose 3.6 percent, while expenditures on
10.00
food services and lodging rose 2.1 percent. Financial
services and insurance spending increased at an annual
8.00
rate of 1.3 percent.

While GDP figures painted a picture of an anemic

economy during the first quarter 2015, payroll
employment trends provided a silver lining. Payroll
employment rose from 140.8 million in January to 141.1
million by the end of March 2015. Accounting for people
finding jobs and those losing jobs, the first quarter
experienced a net employment of 767,000 jobs.
One-month Payroll Job Changes (in thousands)
600
400
200

-200

2000.Jan
2000.Sep
2001.May
2002.Jan
2002.Sep
2003.May
2004.Jan
2004.Sep
2005.May
2006.Jan
2006.Sep
2007.May
2008.Jan
2008.Sep
2009.May
2010.Jan
2010.Sep
2011.May
2012.Jan
2012.Sep
2013.May
2014.Jan
2014.Sep

-400
-600
-800

-1000

6.00
4.00
2.00
0.00
-2.00

1960.Q1
1962.Q3
1965.Q1
1967.Q3
1970.Q1
1972.Q3
1975.Q1
1977.Q3
1980.Q1
1982.Q3
1985.Q1
1987.Q3
1990.Q1
1992.Q3
1995.Q1
1997.Q3
2000.Q1
2002.Q3
2005.Q1
2007.Q3
2010.Q1
2012.Q3
2015.Q1

Consumers spending on goods continued in the first

quarter, but at a much slower pace compared with the
latter half of 2014. Durable goods spending rose 1.1
percent, driven by purchases of recreational goods and
vehicles, as well as furnishings and household
appliances. Purchases of nondurable goods were barely
higher at 0.1 percent as consumers cut back on spending
at restaurants and department stores. With the cold winter
weather, spending on gasoline, fuel oil and other energy
goods rose 4.4 percent.

Real Personal Income Excluding Transfer Receipts

(SAAR, Chn.2009$) %Chg YoY

-4.00
-6.00
-8.00

Source: BEA

Service industries were the major providers of new jobs,

as education and health tied with trade transportation and
utilities, each contributing 147,000 new positions.
Professional and business services added 144,000 new
jobs, while leisure and hospitality added 114,000 new
employees. Goods-producing industries provided 125,000
new jobs, mostly in construction and manufacturing.
Another positive change on the employment front
occurred in compensation. Adjusted for inflation, average
hourly earnings of all employees rose 2.2 percent on a
yearly basis, during the first quarter 2015. Based on the
Bureau of Labor Statistics data, the increase stands out in
contrast to the past five years, during which real hourly
earnings declined 0.02 percent. For production and
nonsupervisory employees real hourly earnings rose 2.6
percent year-over-year.

Source: BLS

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

The unemployment rate declined from an average 5.7

percent in the fourth quarter 2014 to 5.6 percent in the
first quarter 2015. The rate dropped to 5.4 percent as of
April of this year. However, with 157 million Americans in
the work force, the labor force participation remained low,
registering 62.8 percent over the period. On a quarterly
basis the labor force participation rate has stayed at the
same level for the past four consecutive quarters. It was
at 67.3 percent in the first quarter 2000.

Annual Growth Rate, %

Real GDP
Nonfarm Payroll
Employment
Consumer Prices
Level
Consumer confidence, as measured by The Conference
Consumer Confidence
Board, reached 101.3 in the first quarter of this year, the
highest level since the third quarter 2007. Separately, the Percent
Consumer sentiment index compiled by the University of
Unemployment
Michigan rose from 89.8 in the last quarter of 2014 to 95.5
Fed Funds Rate
in the first quarter 2015. This figure posted its highest
3-Month T-bill Rate
value since the third quarter 2004.
Corporate Aaa Bond Yield
Looking ahead at the remainder of this year, NAR expects
10-Year Govt Bond
GDP to pick up pace over the next three quarters to an
30-Year Govt Bond
annual rate of 2.3 percent. Payroll employment is
projected to increase 2.0 percent, accompanied by an
unemployment rate of 5.4 percent. While the markets are
watching the Federal Reserves anticipated hike in the
funds target rate, inflation remains contained, and is
projected to reach 0.3 percent in 2015.

2013

2014

2015

2016

2.2

2.6

2.3

3.0

1.7
1.5

1.9
1.6

2.0
0.3

2.1
3.2

73

87

99

101

7.4
0.1
0.1
4.3
2.6
3.4

6.1
0.1
0.1
4.2
2.6
3.4

5.4
0.4
0.6
4.0
2.2
3.0

5.3
1.6
1.9
5.2
3.3
4.2

Source: National Association of REALTORS

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

Commercial fundamentals continued on an upward trend

in the first quarter 2015, despite a slumping economy,
however the pace moderated. Net absorption rose across
the property types, driving rents higher. As employment
gains are expected to continue into 2015, demand for
commercial space is expected to advance.
Office absorption is projected to total 51.8 million square
feet in 2015, leading vacancy rates on a gradual decline
to 15.5 percent by the end of the year. Office vacancies
continue to be elevated due to employers extracting
space-utilization efficiencies. Office rents are forecast to
rise 3.4 percent in 2015.
Industrial marketsespecially ports and intermodal
distribution centershave been positioning for the
opening of the Panama Canal, with coastal markets
pouring investments into infrastructure. Demand for
industrial space is expected to total 108.8 million square
feet in 2015. With new supply projected to reach 87.4
million square feet, availability rates will likely decline to
8.2 percent by the fourth quarter. Industrial rents should
experience a 3.1 percent gain for the year.
With rising consumer confidence, the outlook for retail
markets is looking up. Coastal markets remain top
performers, displaying low vacancies and rising rents.
Absorption is expected to reach 15.7 million square feet
nationally in 2015, lowering vacancies to 9.5 percent by
the last quarter of the year. Rents are projected to rise 2.6
percent this year.

NATIONAL

3.57%

OFFICE

3.30%

INDUSTRIAL

3.47%

RETAIL

4.93%

APARTMENT

2.85%

Multifamily demand is expected to remain strong,

benefitting from growing household formation. However,
this year supply of new space is projected to exceed
demand. Apartment net absorption is estimated to reach
a little over 172,500 units in 2015, while new apartment
completions will add 230,200 units on the market. In turn,
apartment vacancies are expected to rise throughout the
year, and close the fourth quarter at 4.4 percent. Rent
growth is projected to slow from above 4.0 percent over
the past few years to 3.6 percent in 2015.
Investment sales for commercial properties in
REALTOR markets picked up speed, rising 11 percent
year-over-year in the first quarter of 2015. Prices
advanced 4 percent year-over-year during the period.
Cap rates declined, averaging 7.8 percent in the first
quarter, a 45 basis point drop year-over-year.
The shortage of available inventory retained its number
one spot, as members reported not finding enough
suitable properties. The perceived pricing gap between
sellers and buyers remained the second highest ranked
concern. REALTORS indicated a moderation in the
direction of commercial business opportunities during the
first quarter 2015, with a 3.8 percent quarterly increase,
following a 5.1 percent rise during the last quarter 2014.

Source: National Council of Real Estate Investment Fiduciaries

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

OFFICE

2015 II 2015 III 2015 IV 2016 I 2016 II 2016 III 2016 IV 2015

2016

Vacancy Rate

15.6%

15.5%

Net Absorption ('000 sq. ft.)

11,080 13,050 14,220 15,565 12,850 15,133 16,490 51,772 60,039

Completions ('000 sq. ft.)

10,257

8,762

9,311

12,185 12,614 11,908 12,319 37,713 49,026

Inventory ('000,000 sq. ft.)

4,151

4,160

4,169

4,182

4,194

4,206

4,218

4,169

4,218

Rent Growth

0.8%

0.9%

0.9%

0.9%

0.9%

0.9%

1.0%

3.4%

3.7%

2015 II 2015 III 2015 IV 2016 I 2016 II 2016 III 2016 IV 2015

2016

INDUSTRIAL
Vacancy Rate

8.4%

15.6%

8.3%

15.5%

8.2%

15.6%

8.3%

15.5%

8.1%

15.5%

8.0%

15.4%

8.0%

15.6%

8.4%

8.1%

Net Absorption ('000 sq. ft.)

27,205 32,646 29,382 18,885 26,229 31,474 28,327 108,821 104,915

Completions ('000 sq. ft.)

27,099 25,350 16,609 15,397 22,728 21,262 13,930 87,415 73,317

Inventory ('000,000 sq. ft.)

8,510

8,535

8,552

8,567

8,590

8,611

8,625

8,552

8,625

Rent Growth

0.8%

0.8%

0.9%

0.8%

0.7%

0.8%

0.8%

3.1%

3.1%

2015 II 2015 III 2015 IV 2016 I 2016 II 2016 III 2016 IV 2015

2016

RETAIL
Vacancy Rate

9.6%

9.6%

9.5%

9.4%

9.2%

9.2%

9.1%

Net Absorption ('000 sq. ft.)

3,629

2,841

5,028

5,693

4,858

3,803

6,732

15,750 21,087

Completions ('000 sq. ft.)

2,028

2,355

2,450

2,940

2,853

3,312

3,445

8,924

12,550

Inventory ('000,000 sq. ft.)

2,054

2,057

2,059

2,062

2,065

2,068

2,072

2,059

2,072

Rent Growth

0.7%

0.7%

0.7%

0.6%

0.7%

0.9%

0.9%

2.6%

3.1%

2015 II 2015 III 2015 IV 2016 I 2016 II 2016 III 2016 IV 2015

2016

MULTI-FAMILY
Vacancy Rate

4.3%

4.3%

4.4%

4.4%

4.4%

4.6%

4.6%

9.6%

4.3%

9.2%

4.5%

Net Absorption (Units)

40,147 37,248 50,673 39,616 35,778 33,195 45,158 172,524 153,747

Completions (Units)

60,745 61,906 62,520 38,526 51,944 52,937 53,462 230,224 196,889

Inventory (Units in millions)

10.3

10.4

10.5

10.5

10.6

10.6

10.7

10.5

10.7

Rent Growth

0.9%

0.9%

0.8%

0.9%

0.8%

0.8%

0.8%

3.6%

3.3%

Sources: National Association of REALTORS / Reis, Inc.

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

Office

Source: NAR, Reis, Inc.

Albuquerque
Atlanta
Austin
Baltimore
Birmingham
Boston
Buffalo
Central New Jersey
Charleston
Charlotte
Chattanooga
Chicago
Cincinnati
Cleveland
Colorado Springs
Columbia
Columbus
Dallas
Dayton
Denver
Detroit
District of Columbia
Fairfield County
Fort Lauderdale
Fort Worth
Greensboro/Winston-Salem
Greenville
Hartford
Houston
Indianapolis
Jacksonville
Kansas City
Knoxville
Las Vegas
Lexington
Little Rock
Long Island

NM
GA
TX
MD
AL
MA
NY
NJ
SC
NC
TN
IL
OH
OH
CO
SC
OH
TX
OH
CO
MI
DC
CT
FL
TX
NC
SC
CT
TX
IN
FL
MO
TN
NV
KY
AR
NY

16.7
19.2
16.1
15.8
13.1
12.9
16.8
20.8
13.3
16.7
14.4
17.7
20.2
22.8
17.3
16.3
18.3
22.1
25.5
17.7
24.6
9.0
21.1
18.6
15.2
20.7
18.4
19.2
15.7
19.3
20.4
16.8
15.0
24.1
17.1
11.6
13.5

Industrial
13.1
10.0
10.9
17.2

12.1
8.4
8.4
8.8

8.6
12.0

7.5
10.8

8.2
9.3

8.0
9.7
6.9
9.9

Retail

Multifamily

11.4
12.4
6.2
6.1
13.6
5.9
13.0
9.5
9.2
9.6
14.5
11.9
11.8
13.9
14.4
10.7
15.3
11.9
16.2
10.6
11.7

3.5
6.0
7.5
4.3
7.2
5.4
3.1
3.0
6.8
6.8
5.7
3.7
3.8
2.8
5.5
6.2
5.7
5.8
4.4
5.3
2.9
7.6
7.1
5.2
4.3
6.3
4.6
3.4
6.9
6.2
7.0
5.6
4.0
5.1
5.0
7.0
3.5

4.7
9.3
11.3
10.8
13.0
9.6
10.9
14.6
12.9
11.3
10.8
12.2
8.0
11.0
4.9

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

Source: NAR, Reis, Inc.

Los Angeles
Louisville
Memphis
Miami
Milwaukee
Minneapolis
Nashville
New Haven
New Orleans
New York
Norfolk/Hampton Roads
Northern New Jersey
Oakland-East Bay
Oklahoma City
Omaha
Orange County
Orlando
Palm Beach
Philadelphia
Phoenix
Pittsburgh
Portland
Providence
Raleigh-Durham
Richmond
Rochester
Sacramento
Salt Lake City
San Antonio
San Bernardino/Riverside
San Diego
San Francisco
San Jose
Seattle
St. Louis

CA
KY
TN
FL
WI
MN
TN
CT
LA
NY
VA
NJ
CA
OK
NE
CA
FL
FL
PA
AZ
PA
OR
RI
NC
VA
NY
CA
UT
TX
CA
CA
CA
CA
WA
MO

Office

Industrial

Retail

Multifamily

14.8
14.8
22.8
14.9
18.1
15.9
13.2
16.6
12.6
8.9
15.0
18.5
17.1
16.9
13.4
16.3
16.5
16.5
13.3
25.1
15.7
11.6
16.1
15.1
12.3
17.0
20.3
17.7
17.7
22.4
14.7
10.6
16.3
12.2
17.0

3.6

5.7
9.7
11.1
6.3
11.7
11.2
7.9
12.8
10.7

3.5
6.1
7.9
4.4
3.8
3.7
5.8
2.7
6.0
4.2
5.5
4.7
2.8
5.7
3.8
3.3
6.1
5.6
3.8
5.0
3.9
4.2
2.7
7.6
4.9
3.0
2.6
4.3
6.8
2.5
2.8
3.8
3.4
5.2
4.2

14.1
5.3
7.2
6.8

8.2

3.4
10.3
5.5
9.5
11.0
8.8
7.7
13.6
11.4
11.1
6.9
7.2
6.4
10.4
16.2
5.4
6.3

9.2
5.4
6.0
12.8
8.8
4.6
11.0
9.5
9.4
10.2
7.7
7.4
12.5
8.3
9.6
12.2
10.0
12.7
10.7
9.1
6.1
3.0
4.6
6.2
11.7

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

Source: NAR, Reis, Inc.

Suburban Maryland
Suburban Virginia
Syracuse
Tacoma
Tampa-St. Petersburg
Tucson
Tulsa
Ventura County
Westchester
Wichita

MD
VA
NY
WA
FL
AZ
OK
CA
NY
KS

Office

Industrial

Retail

Multifamily

15.8
17.6
14.5
15.2
19.7
17.3
16.3
16.4
18.4
17.6

10.5
10.3

8.0
5.4
14.4
12.4
10.6
9.4
14.8
8.5
7.4
13.2

4.8
5.7
3.0
3.5
5.0
5.4
5.2
2.9
2.9
4.3

7.8

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

COMMERCIAL REAL ESTATE

OUTLOOK

Sales Volume

8%

30%
Percent Change, year-over-year

Direction of Business Opportunity

Sales Prices
6%

20%

4%

10%

2%

0%

0%

-10%

-2%
-4%

-20%

-6%

-30%

-8%

-40%

-10%

-50%

-12%

Dollar amount of last transaction (%)

29

Between $250K and $500K

24

Between $500K and $1 M

18

Between $1 M and $2 M

14

$2 M and $5 M

Between $5 M and $10 M

Over $10 M

REALTORS CRE Transaction Closing Rate

2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3
2011.Q4
2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
2015.Q1

Under $250K

80%
70%
60%
50%
40%
30%
20%
10%
0%

REALTORS Commercial Capitalization Rates

12.0%

Office

Industrial

Retail

Multifamily

Hotel

11.0%
10.0%
9.0%
8.0%
7.0%
6.0%
5.0%

NATIONAL ASSOCIATION of REALTORS | RESEARCH DIVISION | www.realtors.org/research-and-statistics

10

COMMERCIAL REAL ESTATE

OUTLOOK

The Research Division of the National Association of REALTORS monitors and analyzes monthly and
quarterly economic indicators, including retail sales, industrial production, producer price index, gross
domestic product and employment data which impact commercial markets over time. In addition, the
Research Division provides several products covering commercial real estate:

Commercial Real Estate Quarterly Market Survey

Commercial Real Estate Lending Survey
Commercial Member Profile
Expectations and Market Realities in Real Estate 2015
CCIM Quarterly Market Trends
SIOR Commercial Real Estate Index

CONTACT
Lawrence Yun, PhD
Chief Economist, Sr. Vice
President, Research
lyun@realtors.org
George Ratiu
Director, Quantitative &
Commercial Research
gratiu@realtors.org

Although the information presented in this report has been obtained

from reliable sources, NAR does not guarantee its accuracy, and such
information may be incomplete. This report is for information purposes
only. All opinions, assumptions and estimates constitute NARs judgment as of the date of this
publication and are subject to change and evolving events. Actual results may vary from forecast results.
For more information:

REALTOR.org/research-and-statistics
economistsoutlook.blogs.realtor.org
www.facebook.com/narresearchgroup
twitter.com/#!/NAR_Research
www.ccim.com/resources/itq
www.siorprofessionalreport-digital.com
Copyright 2015 NATIONAL ASSOCIATION OF REALTORS. Reproduction, reprinting or retransmission in
any form is prohibited without written permission. For questions regarding this matter please e-mail
eresearch@realtors.org.

500 New Jersey Avenue, NW Washington, DC 20001 2020

800.874.6500 www.REALTOR.org

11