There’s little evidence that the commercial real estate market is headed for a thud in 2018. But change is coming, as a new commercial forecast predicts that the days of tumbling vacancy rates and soaring sales appear to be over, starting with this year.
Avison Young recently released its 2018 North America and Europe commercial real estate forecast. One of the major findings is that vacancy rates in both the U.S. office and industrial markets are expected to rise, at least slightly, throughout this year.
That doesn’t mean that the office and industrial markets are forecast to be weak in 2018. Avison Young just says that the days when vacancy rates fell by 10 or more basis points every year appear to be over for now.
Consider the industrial market. Avison Young says that as 2017 came to an end, the U.S. industrial sector had an overall vacancy rate of 5.2 percent. That’s a good figure, and it’s 10 basis points down from the end of 2016. At the same time, 2017 ended with another 188 million square feet of industrial construction underway in the United States.
But, Avison Young also reported that the U.S. industrial vacancy rate is expected to rise slightly by the end of 2018 to 5.4 percent. That’s not a huge jump. It’s almost a blip. But it is a marked change from years in which this sector’s vacancy rate continued to fall by sizable levels.
Avison Young reports similar numbers for the U.S. office market. The 46 U.S. office markets that Avison Young tracks had an overall vacancy rate of 11.8 percent at the end of 2017. That, too, was a drop of 10 basis points from the end of 2016.
But the company predicts an increase in the U.S. office vacancy rate that will be higher at the end of 2018. Again, the increase isn’t much, with Avison Young predicting that the office vacancy rate here will first to 12 percent by the end of 2018, but it is an increase, not a drop.
The rise in vacancies doesn’t mean that there won’t be opportunities for investors. Officials with Avison Young point out that commercial real estate throughout North America is still considered a favored, and safe, haven for foreign investors.
“As we greet the New Year, a critical difference is that change is in motion, change that is positive, powerful and moving very quickly,” said Mark Rose, chairman and chief executive officer of Avison Young. “This is the type of change that creates opportunity and allows for success. Those who cannot accept this new reality will dismiss it at their own peril.”
Earl Webb, president of U.S. operations for Avison Young, said that it’s true that overall sales transaction volume fell in 2017 for the second year in a row. But this doesn’t mean that sales numbers were bad. They were just a bit behind the higher levels of 2015.
“An abundance of capital remains available for trades, pricing is strong and property markets are registering meaningful development in response to demand for modern properties,” Webb said. “These factors will keep the U.S. commercial property market on its current upward trajectory through 2018.”