How Commercial Real Estate Measures Economic Health
Low Vacancy in Commercial Real Estate Properties are a Sign that the Economy is Improving
Commercial real estate vacancy rates are closely tied to broader economic health. In general, when the economy is doing well, vacancy drops and rent increases. The opposite is true for when the economy is down. However, that doesn’t answer the important question: where are we in the cycle?
In an article by the Albuquerque Journal, real estate broker Walt Arnold said that “we haven’t replaced all the jobs lost during the recession”. According to him, until employment and private-sector development increase, there’s little chance of the commercial real estate market taking off. Companies need to grow and develop before property prices can rise.
On the upside, it looks as though office, industrial, and retail properties all enjoyed a slow but steady increase throughout 2015. In particular, the office market had not been faring well, with vacancy rates hovering at a historical high for the past five years. 2015 showed a slight improvement, but not enough to indicate a significant economic upturn. In comparison, the industrial vacancy rate was at a its lowest since the financial crisis: generally good news, but it did not encourage the amount of building one would expect. Still, if this low-vacancy environment persists, it is likely to encourage developers to take on new projects.
But these statistics are grim when in context with the pre-crash economy. In Albuquerque, office vacancy was around 20% in the fourth quarter of 2015, compared to the 13.2% average it enjoyed from 2004-2009. After the crash, vacancy peaked at 21.5% in Q3 2014. Today’s numbers are both an improvement and an indication of good things to come, but they are a far cry from the mid-2000s.
According to Scott Throckmorton of Argus Investment Realty, the office market is trending toward “flight to quality”. There is a relatively low vacancy among new, high-quality office buildings. Rather, vacancy is growing in lower-quality buildings, despite their cheaper rent. This has driven down average rents across the board, even though demand is still booming in the pricier locations.
Another factor is that office real estate relies on services jobs, such as receptionists and call center professionals, to drive growth. While the services sector has enjoyed a relative recovery from the recession, its structure has changed, with many employees switching over to education and health care rather than business. As a result, the increase in services jobs has not done much to push up office real estate activity.
From the looks of it, the tough times will continue for office real estate, but it is good news that the situation isn’t getting worse. Commercial real estate is finally starting to grow in value, even if only slowly—and alongside this gradual decrease in vacancy rates, we should see an overall improvement in the economy.