On a national basis, Yun says the economy is poised for a slight improvement this year. He notes that '16 represented the eleventh consecutive year of subpar GDP growth, but adds, “renewed corporate optimism leading to a focus on investment and a desperately needed boost in residential construction should pave the way for modest expansion this year of around 2.4%. Steady hiring and low local unemployment levels are finally supporting higher wages and increased spending, which in turn bodes well for sustained demand for all commercial property types.”

Realtor forecasts call for national office vacancy rates to retreat 110 percentage points to 12.1%, thanks to job growth in business and professional services. The vacancy rate for industrial space is expected to decline from its current 8.4% to 7.1%, while retail availability will decline 70 points to 11.2%.

Only multifamily will see little change in its vacancy rate over the next year, and the sector is expected to continue leading the way on account of ongoing supply and affordability challenges in for-sale housing. “Especially in the costliest metro areas, higher home prices and mortgage rates are squeezing the budget for many renters looking to buy and inevitably forcing them to sign a lease for at least another year,” says Yun.

NAR's latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. The NAR commercial community includes commercial members, real estate boards, committees, subcommittees and forums; and NAR commercial affiliate organizations: CCIM Institute, Institute of Real Estate Management, Realtors Land Institute, SIOR and Counselors of Real Estate.

WASHINGTON, DC—Stability and decent yields will continue to underpin the commercial real estate sector this year, according to the National Association of Realtors' quarterly commercial real estate forecast. A key theme for 2017 is the growing demand in smaller markets.

“Similar to the biggest ongoing challenges in the residential market, supply and demand imbalances continue to put upward pressure on commercial property prices as investors search for yield in smaller markets,” says Lawrence Yun, NAR's chief economist. “Realtors are increasingly citing inventory shortages as their top concern as the pace of new projects slows in large cities and middle-tier and smaller markets see a growing appetite for space.”

Yun notes that commercial property prices surpassed pre-crisis levels last year because of aggressive bidding and lower inventory levels, especially when it comes to class A assets in the larger markets. However, he adds, with the Federal Reserve expected to raise short-term rates three times—and possibly more—this year, a minor price correction may be in the offing as cap rates move higher.

In the realm of commercial properties priced at $2.5 million or less, the playing field on which most NAR commercial members operate, year-over-year sales volume rose 12.9%. Pricing was up by an average of 5.5% from a year ago across the property types, and NAR's fourth-quarter “Market Trends” survey cites inventory shortages at the top of the list of current challenges, followed by buyer-seller pricing gaps and local economic conditions.

On a national basis, Yun says the economy is poised for a slight improvement this year. He notes that '16 represented the eleventh consecutive year of subpar GDP growth, but adds, “renewed corporate optimism leading to a focus on investment and a desperately needed boost in residential construction should pave the way for modest expansion this year of around 2.4%. Steady hiring and low local unemployment levels are finally supporting higher wages and increased spending, which in turn bodes well for sustained demand for all commercial property types.”

Realtor forecasts call for national office vacancy rates to retreat 110 percentage points to 12.1%, thanks to job growth in business and professional services. The vacancy rate for industrial space is expected to decline from its current 8.4% to 7.1%, while retail availability will decline 70 points to 11.2%.

Only multifamily will see little change in its vacancy rate over the next year, and the sector is expected to continue leading the way on account of ongoing supply and affordability challenges in for-sale housing. “Especially in the costliest metro areas, higher home prices and mortgage rates are squeezing the budget for many renters looking to buy and inevitably forcing them to sign a lease for at least another year,” says Yun.

NAR's latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. The NAR commercial community includes commercial members, real estate boards, committees, subcommittees and forums; and NAR commercial affiliate organizations: CCIM Institute, Institute of Real Estate Management, Realtors Land Institute, SIOR and Counselors of Real Estate.