Rental Markets Finally Cooling Off?

November 25, 2015

The best days for the multifamily sector may finally be winding down, as new construction has already surpassed historical averages.

"This sector has been the industry's top performer over the past several years as a result of younger households struggling to become home owners and the demand for apartments far exceeding supply in many markets," Lawrence Yun, chief economist for the National Association of REALTORS®, notes in NAR's latest quarterly commercial real estate forecast.

While rising occupancy and rents will likely continue, property prices are forecast to decline slightly in 2016 if the Federal Reserve starts raising interest rates. However, investments are still expected to continue on an upward trend, Yun predicts.

"Rising sales and investor optimism in recent years has pushed prices past their peak in many of the larger commercial markets," says Yun. "Investors — especially those abroad — looking for better yields will likely seek to invest their larger sums of cash in smaller markets and into lower-end properties."

Still, the future for the commercial real estate sector overall is looking bright and will likely continue to grow in 2016, despite headwinds coming from a fragile economy in recent months, according to NAR's report.

"Temporary turbulence in the financial markets, a stronger U.S. dollar hurting exports, and economic weakness overseas chipped away at third-quarter growth and led to some deceleration in the pace of commercial investments," says Yun. "The good news is that these deterrents are slowly residing, which should ultimately reawaken the growing appetite for commercial space heading into next year."

Yun notes that healthier labor markets likely will pull down vacancy rates and push rents higher in many metros.

National office vacancy rates are forecast by REALTORS® to drop 0.8 percent to 14.8 percent over the coming year as continued job creation spurs demand. The vacancy rate for industrial space is expected to fall 1.4 percent to 9.7 percent, and retail availability likely will decline 1.3 percent to 11.3 percent. New apartment construction projects are entering the pipeline in several markets, so multifamily vacancies are forecast to rise over the next year from 6.1 percent to 7.3 percent. 

Regionally, several states in the South and West have outperformed the rest of the country in job growth over the past year. "Led by strong demand for apartments from faster household formation and rent growth, metro areas in those states are expected to see elevated levels of new construction, which will lead to a slight uptick in vacancy rates," NAR's report notes.

View NAR's latest Commercial Real Estate Outlook for more projections on the four major commercial sectors: office, industrial, retail, and multifamily markets.

Source: National Association of REALTORS®