National Association of REALTORS®

COMMERCIAL REAL ESTATE

OUTLOOK: 2018.Q4
Commercial Real Estate Outlook: 2018.Q4

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information purposes only.
 COMMERCIAL REAL ESTATE

OUTLOOK

NATIONAL ASSOCIATION OF REALTORS®

2019 LEADERSHIP TEAM

JOHN SMABY, CRB, GRI

President

VINCE MALTA
President-Elect

CHARLIE OPPLER
First Vice President

JOHN FLOR, ABR, CRS, GRI, EPRO

Treasurer

ELIZABETH MENDENHALL, ABR, ABRM,

CIPS, CRB, GRI, PMN, EPRO
2018 President

BRIAN COPELAND, CIPS, CRS, GRI, EPRO

Vice President of Association Affairs

TRACY KASPER, CRS, GRI, SFR

Vice President of Advocacy

BOB GOLDBERG
Chief Executive Officer
 COMMERCIAL REAL ESTATE

OUTLOOK

CONTENTS

1 | Economic Overview………………………………………………………………………………… 5

2 | Commercial Real Estate Investments…………………………………………………….. 8

3 | Commercial Real Estate Fundamentals…………………………………………………… 12

4 | Outlook……………………….………………………………………………………………………….. 15
 COMMERCIAL REAL ESTATE

OUTLOOK
GEORGE RATIU
Gross Domestic Product Director, Housing & Commercial Research
gratiu@realtors.org
The economy expanded at a stronger pace of 3.5
percent in 2018 Q3 (advance estimate). The GAY CORORATON
economy has been growing more strongly in 2018 Research Economist
compared to 2017, with growth averaging 3.3 scororaton@realtors.org
percent to date, compared to 2.2 percent in 2017.
The third quarter growth was fueled by private
consumer and government spending, as business Investment spending was dragged down by the 5.1
investment spending slowed and exports contracted. percent contraction in investment for structures
(after three quarters of expansion) and the 6.8
Exhibit 1.1: Real GDP (% Chg Annual Rate) percent contraction in investments for transportation
6
equipment (after four quarters of growth). The
5 strongest expansions were in industrial equipment,
4 at 12.5 percent, and intellectual property products,
3 at 8.7 percent.
2
Private residential investment contracted 4.0
1 percent in 2018.Q3. The number of building starts—
0 another indicator of residential investment —
2014-Q1

2017
2012-Q1
2012-Q3
2013-Q1
2013-Q3

2014-Q3
2015-Q1
2015-Q3
2016-Q1
2016-Q3
2017-Q1
2017-Q3
2018-Q1
2018-Q3

-1 declined slightly to a seasonally-adjusted annual

rate of 1.20 million units in September 2018 after
-2
peaking at 1.33 million in May 2018. Labor, land,
financing, and raw material costs are cited by home
Source: BEA
builders as the main headwinds facing residential
Private consumption spending—which accounts for construction.
69 percent of GDP— expanded at a stronger pace of
Exhibit 1.2: Real Consumer Spending &
4.0 percent in 2018 Q3, the strongest since pace
Business Investments (% Chg Annual
since 2015. Spending rose for all types of consumer
goods, except for Other Durable Goods (excluding Rate)
motor vehicles, furniture, and household equipment). Consumer Spending

The Conference Board’s Consumer Confidence 40.0 Non-residential Private Fixed Investments
Residential Private Fixed Investments
Index continues to show strong consumer
20.0
confidence, with the index at 137.9 in October 2018,
up from one year ago (126.2). 0.0

-20.0
On the other hand, private fixed investment spending
contracted by 0.3 percent as non-residential -40.0
2012-Q4
2006-Q1
2006-Q4
2007-Q3
2008-Q2
2009-Q1
2009-Q4
2010-Q3
2011-Q2
2012-Q1

2013-Q3
2014-Q2
2015-Q1
2015-Q4
2016-Q3
2017-Q2
2018-Q1

investment spending rose a meek 0.8 percent and

residential investment spending fell 4.0 percent.
Source: BEA, SAAR, Bil.Chn.2009$

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 5

 COMMERCIAL REAL ESTATE

OUTLOOK
Exports contracted by 3.5 percent while imports Employment
rose by 9.1 percent, creating a negative
contribution to growth. The decrease in exports Employment conditions remained robust. During the
was, in part, due to a stronger dollar that rose in 12-month period of November 2017‒ October 2018,
value against the currencies of the U.S.’s trading the economy created 2.51 million payroll jobs, more
partners by five percent year-over-year in 2018.Q3. than the 2.15 million jobs that were added in the
same 12-month period one year ago. The economy
Exhibit 1.3: Real Exports & Imports (% has been steadily adding employment since October
Chg Annual Rate) 2010, with 19.4 million jobs to date, which more than
40 offsets the 9.1 million jobs lost during 2007 – 2010.
Exports Imports
20
Exhibit 1.5: 12-Month Payroll Employment
0 4000 Change ('000)
2000
-20
0
-40 -2000
2006-Q1
2006-Q4
2007-Q3
2008-Q2
2009-Q1
2009-Q4
2010-Q3
2011-Q2
2012-Q1
2012-Q4
2013-Q3
2014-Q2
2015-Q1
2015-Q4
2016-Q3
2017-Q2
2018-Q1

-4000
-6000
Source: BEA, SAAR, Bil.Chn.2009$ -8000

2011-Jan
2008-Feb
2008-Sep
2009-Apr

2015-Feb
2015-Sep
2011-Aug
2012-Mar

2013-May

2016-Apr

2018-Jan
2018-Aug
2009-Nov

2016-Nov
2017-Jun
2006-Dec
2007-Jul

2014-Jul
2010-Jun

2013-Dec
2012-Oct
Federal and state/local consumption and investment
spending rose by 3.3 percent, the fourth
consecutive quarter of expansion since 2017.Q4. Source: BLS

Federal spending rose 3.3 percent while state and During the 12-month period of November 2017–
local spending increased 3.2 percent. Government October 2018, employment expanded in all sectors,
spending has been growing consistently since except information services
2017.Q4. (-15,000) and utilities (-2,000). The retail trade
sector, which has lost jobs in the past, generated
Exhibit 1.4: Real Government Spending 37,000 jobs.
(% Chg Annual Rate)
Exhibit 1.6: Payroll Employment: 12-Month
Federal State and local Change ('000)
15.0
10.0 Government 66
Leisure/Hospitality 254
5.0 Educ./Health 499
Prof./Bus. Services 516
0.0 Financial Activities 115
-5.0 Information -15
Utilities -2
-10.0 Transp./Warehousing 184
Retail Trade 37
Q1/2006
Q4/2006
Q3/2007
Q2/2008
Q1/2009
Q4/2009
Q3/2010
Q2/2011
Q1/2012
Q4/2012
Q3/2013
Q2/2014
Q1/2015
Q4/2015
Q3/2016
Q2/2017
Q1/2018

Wholesale Trade 94
Manufacturing 296
Construction 330
Mining/Logging 65
Source: BEA, SAAR, Bil.Chn.2009$ -100 0 100 200 300 400 500 600
Source: BLS

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 6

 COMMERCIAL REAL ESTATE

In September 2018, employment increased at the
fastest pace from year-ago levels in Florida, Utah,
Nevada, Texas, Washington, Oregon, Idaho,
Arizona, and Colorado, with employment growing by
at least 2.5 percent. Nationally, non-farm
employment rose 1.7 percent.
6.0
OUTLOOK
Inflation and Interest Rates
With sustained growth, inflation has trended up. In
October 2018, prices for all items (CPI) rose 2.5
percent from the levels one year ago. Core inflation,
which measures the change in prices other than
food and energy, rose to 2.1 percent. The Federal
Open Market Operations Committee (FOMC) seeks
to keep inflation at two percent. Towards this
objective, FOMC has raised the federal funds target
range thrice in 2018, to a range of 2 to 2.25 by
September 2018, an increase of 75 basis points
since December 2017 (1.25-1.5). With the higher
target, the 30-year fixed rate for mortgages rose to
an average of 4.83 percent in October 2018 (3.92
percent in October 2017).
Exhibit 1.9: Inflation
All Items All Items, Less Food and Energy

4.0

2.0

0.0

-2.0
The labor market continued to tighten. The
-4.0
unemployment rate dropped to 3.7 percent in
Jul/2007
Sep/2001
Jul/2002

Sep/2006

Sep/2011
Jul/2012

Sep/2016
Jul/2017
May/2018
May/2003

May/2008

May/2013
Jan/2000
Nov/2000

Mar/2004
Jan/2005
Nov/2005

Mar/2009
Jan/2010
Nov/2010

Mar/2014
Jan/2015
Nov/2015
September and October 2018, a level last reached
in September and October 1969.
Source: BLS

Exhibit 1.8: Unemployment Exhibit 1.10: Interest Rates

12 Federal Funds Rate (Midpoint)
10.0000
10
30-Year Fixed Rate for Mortgages
8 8.0000
6 6.0000
4
4.0000
2
2.0000
0
2013-Jan

2017-Feb
2006-Jan
2006-Aug
2007-Mar

2008-May

2010-Feb
2010-Sep
2011-Apr

2014-Mar

2015-May

2017-Sep
2018-Apr
2011-Nov

2013-Aug
2007-Oct

2008-Dec
2009-Jul

2012-Jun

2014-Oct

2016-Jul
2015-Dec

0.0000
Jan/2004
Jan/2000
Jan/2001
Jan/2002
Jan/2003

Jan/2005
Jan/2006
Jan/2007
Jan/2008
Jan/2009
Jan/2010
Jan/2011
Jan/2012
Jan/2013
Jan/2014
Jan/2015
Jan/2016
Jan/2017
Jan/2018

Source: BLS Source: FRB, Freddie Mac

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 7

 COMMERCIAL REAL ESTATE

Commercial space is concentrated in large
buildings, yet large buildings are a relatively small
number of the overall stock of commercial buildings.
Based on Energy Information Administration data
approximately 72 percent of commercial buildings
are less than 10,000 square feet in size.1 An
additional eight percent of commercial buildings are
less than 17,000 square feet in size. In short, the
commercial real estate market is bifurcated, with the
majority of buildings (81 percent) relatively small
(SCRE), but with the bulk of commercial space (71
percent) in larger buildings (LCRE).
Likewise, commercial sales transactions are
measured and reported based on deal value.
Commercial deals at the higher end—$2.5 million
and above—comprise a large share of investment
sales, and generally receive most of the press
coverage. Smaller commercial transactions tend to
be obscured given their values. However, these
smaller properties comprise the backbone of daily
economic activity—e.g. neighborhood shopping
centers, warehouses, small offices, supermarkets,
Billions
OUTLOOK
markets posted record cumulative year-to-date
sales during the third quarter, including Phoenix,
Philadelphia, Raleigh/Durham and the Inland
Empire.
Investment volume in the large cap space totaled
$152.7 billion, a 17 percent jump from the same
period in 2017, according to Real Capital Analytics
(RCA). Deal volume advanced for all property types,
except industrial, with retail properties notching a 90
percent gain.
Apartment sales accounted for the largest share of
transactions, with $48.3 billion in closed
transactions, a 14 percent gain year-over-year,
based on RCA data. Office properties captured the
second largest share of investor dollars, with $34.3
billion in sales. Office investment volume was up 15
Exhibit 2.1: CRE Sales Volume ($2.5M+)
Individual Portfolio Entity
$200

etc. Given the importance of these buildings to local

$180
communities, and REALTORS®’ active roles in
serving these markets, this report focuses on $160
illuminating trends in both large and small markets.
$140
Large Cap Commercial Real Estate Markets $120

$100
The third quarter witnessed a resurgence of large
transactions, leading to higher deal volume and $80
prices. However, pricing expectations widened
between buyers and sellers, as the rate of the 10- $60
year Treasury Notes exceeded 3.2 percent. $40
Investment trends in LCRE maintained a broad-
based approach, as sales in both gateway cities and $20
secondary markets advanced. Several smaller $-
07Q1
07Q4
08Q3
09Q2
10Q1
10Q4
11Q3
12Q2
13Q1
13Q4
14Q3
15Q2
16Q1
16Q4
17Q3
18Q2

1Smith and Ratiu, (2015), "Small Commercial Real Estate Market,"

National Association of REALTORS® Source: Real Capital Analytics

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 COMMERCIAL REAL ESTATE

OUTLOOK
percent from a year ago. The retail sector closed average of 5.4 percent and 6.6 percent,
$28.4 billion in sales during the third quarter, fueled respectively. Industrial transactions experienced a
by Brookfield’s acquisition of GGP. Industrial 13 bps increase in cap rates, while retail deals
transactions declined one percent from the prior showed sideways movement, both with an average
year, with sales totaling $23.7 billion in the third of 6.5 percent.
quarter.
Exhibit 2.2: Commercial Property Price
Sales in the six major metros tracked by RCA rose 5 Indices
percent from a year ago, to $51.4 billion. However,
large-cap transactions in secondary and tertiary NCREIF Green Street Advisors
markets inked a 25 percent leap during the quarter. Real Capital Analytics
350.0
As investor activity picked up, so did prices in LCRE
markets, posting a 7.2 percent advance year-over-
300.0
year in the third quarter of 2018, according to RCA’s
Commercial Property Price Index. All property types 250.0
recorded higher prices during the quarter, with the
apartment sector showing double-digit gains from a 200.0
year ago. Prices in non-major markets increased at
almost double the rate of those in the six major 150.0
markets.
100.0
Commercial pricing mirrored the mixed performance
of various property sector, as illustrated by other 50.0
commercial real estate price indices. The Green
Street Advisors Commercial Property Price Index— 0.0
2007-Q1
2001-Q1
2002-Q1
2003-Q1
2004-Q1
2005-Q1
2006-Q1

2008-Q1
2009-Q1
2010-Q1
2011-Q1
2012-Q1
2013-Q1
2014-Q1
2015-Q1
2016-Q1
2017-Q1
2018-Q1
focused on large cap properties—rose 1.7 percent
on a yearly basis during the quarter, at a value of
131.5. The National Council of Real Estate
Investment Fiduciaries (NCREIF) Price Index Exhibit 2.3: NCREIF Property Index Returns—
increased 6.5 percent year-over-year in the same 2018.Q3
period, to a value of 307.4.
NATIONAL 1.67%
As interest rates rose, buyers expected cap rates to OFFICE 1.69%
follow. However, strong demand maintained a
slightly downward trend for cap rates in the third INDUSTRIAL 3.36%
quarter. Based on RCA data, cap rates for all RETAIL 0.56%
properties averaged 6.7 percent during the quarter.
APARTMENT 1.55%
Apartment and office transactions continued
Source: National Council of Real Estate Investment Fiduciaries
experiencing slight cap rate compression, with an

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 9

 COMMERCIAL REAL ESTATE

OUTLOOK
Small Cap Commercial Real Estate Markets

Following a moderation in momentum during the Prices in SCRE markets rose 1.4 percent during the
second quarter, small cap markets rebounded in the third quarter of this year. The gain was the softest
third quarter of 2018, as investors remained focused since the fourth quarter of 2013, and follows the
on higher yields. Commercial real estate sales in strong appreciation trend from 2016-17.
SCRE markets increased by 1.6 percent from the
same quarter in 2017. Capitalization rates in SCRE markets moved
sideways for the third quarter in a row. Based on
The shortage of available commercial inventory RCA data, cap rates for core properties averaged of
remained ranked as the top concern for 6.6 percent.
REALTORS®, fueling continued increases in
transaction prices. Close to 40 percent of
respondents to a market survey ranked tight
inventory as the number one issue affecting their
markets, followed by a third of respondents who
indicated that the pricing gap between buyers and
sellers was a main issue.

Exhibit 2.4: Sales Volume (YoY % Chg) Exhibit 2.5: Sales Prices (YoY % Chg)
Real Capital Analytics CRE Markets Real Capital Analytics CRE Markets
REALTOR® CRE Markets REALTOR® CRE Markets
200% 15.0%

10.0%
150%

5.0%
100%
0.0%
2009.Q3
2008.Q4

2010.Q2
2011.Q1
2011.Q4
2012.Q3
2013.Q2
2014.Q1
2014.Q4
2015.Q3
2016.Q2
2017.Q1
2017.Q4
2018.Q3
50% -5.0%

0% -10.0%
2014.Q4
2008.Q4
2009.Q3
2010.Q2
2011.Q1
2011.Q4
2012.Q3
2013.Q2
2014.Q1

2015.Q3
2016.Q2
2017.Q1
2017.Q4
2018.Q3

-15.0%
-50%
-20.0%

-100% Sources: National Association of REALTORS®, Real Capital Analytics

-25.0% Sources: National Association of REALTORS®, Real Capital Analytics

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 COMMERCIAL REAL ESTATE

International transactions remained a fixture in
REALTORS®’ CRE markets in the final quarter of
the year, accounting for 12.0 percent of responses
to a survey. The average international sale price
was $5.1 million in the third quarter of the year.
Indicating a likely preference for safety of capital
over returns, the average cap rate for international
deals in SCRE markets averaged 6.4 percent.
OUTLOOK
Longer-dated bond yields kept on an upward path in
the third quarter of 2018. The Treasury 10-year note
averaged 2.88 percent in the third. However, the
rate picked up in November, moving to 3.13 percent
in November of this year. The rising 10-year Note
rate narrowed the spread with SCRE cap rates
below 400 bps, as forward expectations project
further spread compression.

Exhibit 2.6: Cap Rates - 2018.Q3 Exhibit 2.7: CRE Spreads: Cap Rates to 10-
Yr. T-Notes (bps)
RCA Markets REALTOR® Markets
8.0% RCA Cap Rates REALTORS® Cap Rates
1200
7.0%
1000
6.0%
800
5.0%

4.0% 600

3.0% 400

2.0% 200
1.0%
0
10Q3
10Q1

11Q1
11Q3
12Q1
12Q3
13Q1
13Q3
14Q1
14Q3
15Q1
15Q3
16Q1
16Q3
17Q1
17Q3
18Q1
18Q3
0.0%
Office Industrial Retail Apartment
Sources: National Association of REALTORS®, Real Capital Analytics Sources: National Association of REALTORS®, Real Capital Analytics

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 11


Large Cap Commercial Real Estate Markets
The commercial fundamentals in LCRE markets
continued to provide solid performance during the
second quarter of 2018, benefitting from strong
economic tailwinds. While demand maintained
course, market metrics were more nuanced across
the core property sectors.
Office buildings experienced continued demand in
the third quarter of 2018, as employment in office-
using industries remained positive. Net absorption of
office spaces totaled 11.0 million square feet during
the quarter, according to CBRE. On the supply side,
suburban completions remained strong, but new
downtown spaces slowed. The quarter notched 7.4
million square feet of new space delivered.
According to CBRE, over 75 percent of newly-
finished space was preleased, as tenants continue
to seek quality work accommodations. Reflecting
the demand-supply balance, the office vacancy rate
declined 10 basis points to 12.8 percent. The asking
rent for office space nationally averaged $33.0 per
square foot.
Demand for industrial properties was solid in the
third quarter of this year, driven by strong consumer
spending and industrial production. Industrial net
absorption totaled 61.5 million square feet during
the third quarter, according to CBRE data. The solid
demand outpaced new deliveries, as completions
totaled 49.9 million square feet, and pushed down
the vacancy rate to 4.3 percent. Industrial asking
rents advanced in the third quarter to $7.21 per
square foot, a 5.6 percent year-over-year increase.
Consumer optimism was robust during the third
quarter, buoyed by a low unemployment rate and
rising wages. With retail spending rising, demand for
retail spaces advanced. Net absorption of retail
properties totaled 13.3 million square during the
NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics
COMMERCIAL REAL ESTATE
OUTLOOK
third quarter, according to CBRE. Retail construction
activity declined, as completions totaled 5.8 million
square feet. The quarter also witnessed the Sears
announcement of Chapter 11 bankruptcy, which is
projected to impact availability going forward. The
retail availability rate slid to 6.4 percent, as asking
retail rents reached $17.41 per square foot, a 4.3
percent increase year-over-year.
The strong economic performance coupled with a
growing population continue to favor demand for
housing. In addition, rising mortgage rates and
continued tightness in residential housing, played in
favor of the multifamily sector, as demand outpaced
completions. Net absorption of multifamily space
totaled 316,700 units over the 12 months ending in
September 2018, according to CBRE. Construction
of multifamily properties maintained momentum,
with 276,300 units delivered over the same period.
The national vacancy rate declined 40 basis points
from a year ago, to an average of 4.0 percent.
Apartment effective rents rose 2.6 percent year-
over-year, to an average of $1,634 per month during
the quarter.
12
 COMMERCIAL REAL ESTATE

OUTLOOK
Small Cap Commercial Real Estate Markets

Commercial fundamentals in REALTORS®’ markets Lease terms remained consistent with historical
posted advances during the quarter, even as trends, as 36-month and 60-month leases
momentum moderated. Leasing volume advanced accounted for 61 percent of total. Two and three-
by 2.0 percent from the preceding quarter, as year leases comprised close to 20 percent of total
demand for space maintained an upward trend in during the quarter.
small cap markets. New construction rose
accelerated, with a 4.9 percent increase from the With demand on a positive trajectory, vacancy rates
prior quarter. Leasing rates increased by 2.0 declined during the quarter, as they reflected the
percent, and concessions declined 2.7 percent. mixed conditions of the core property types. The
office and retail vacancy rates rose in SCRE
Exhibit 3.1: REALTORS® Fundamentals markets, to 12.9 percent and 12.6 percent,
respectively, compared with a year ago. Industrial
New Construction Leasing Volume
properties mirrored solid demand, leading to
15%
declining vacancies, averaging 6.8 percent in the
10% third quarter. Multifamily spaces contended with
rising supply, which pushed vacancy rates up 40
5% basis points, to 6.2 percent.
% Change, Quarter-over-quarter

0% Exhibit 3.2: REALTORS® Commercial

2013.Q1

2014.Q3
2009.Q2
2010.Q1
2010.Q4
2011.Q3
2012.Q2

2013.Q4

2015.Q2
2016.Q1
2016.Q4
2017.Q3
2018.Q2

Vacancy Rates
-5%
Office Industrial Retail
-10%
Multifamily Hotel
-15% 30.0%

-20% 25.0%

-25%
20.0%
-30%
Source: National Association of Realtors®
15.0%
Tenants in REALTORS®’ markets remained
focused on smaller footprints. In the second quarter, 10.0%
the ‘5,000 square feet and below’ segment
accounted for 77.0 percent of activity. The ‘5,000 – 5.0%
7,499 square feet’ segment posted rising tenant
demand, and accounted for 11.0 percent of activity 0.0%
during the quarter. The ‘10,000 – 49,999 square
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
2013.Q3
2014.Q1
2014.Q3
2015.Q1
2015.Q3
2016.Q1
2016.Q3
2017.Q1
2017.Q3
2018.Q1
2018.Q3

feet’ segment comprised 6.0 percent of reported

transactions. The ‘50,000 square feet and above’
segment accounted for 3.0 percent of total activity. Source: National Association of Realtors®

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 COMMERCIAL REAL ESTATE

OUTLOOK
Prospects for residential real estate (multi-family)
remained solid, with rental vacancy rates edging
lower in the second quarter of 2018. After trending
upwards starting from 6.7 percent in 2016.Q2 to a
peak of 7.5 percent in 2017.Q3, the vacancy rate
started trending downwards, to 6.8 percent in 2018
Q2, according to the Census Bureau.

Vacancy rates fell again as housing construction for

1-family and multi-family units has been falling
behind household formation. Seasonally-adjusted
housing starts were at 1.26 million as of September
2018, short of the 1.56 net new households formed
during September 2017 – September 2018. In
addition, there was demand for about 510,000
housing units to replace damaged or lost stock.

Among the large metro areas with vacancy rates

lower than the national average were: Denver-
Aurora Lakewood (2.4%), Boston-Cambridge-
Newton (3.3%), San Jose-Sunnyvale-Santa Clara
(3.6%), Seattle-Tacoma (4.1%) , Los Angeles- Long
Beach –Anaheim (4.2%), New York-Newark-Jersey
City (4.5%), San Francisco-Oakland-Hayward (5.5%),
and Washington-Alexandria-Arlington (5.5%).

Recently, Amazon announced New York and Crystal

City in Arlington, VA as the sites of its second
headquarters, with 25,000 new jobs expected in each
metro area in the next 10-15 years, or about 2,000
jobs annually. Two thousand jobs per year seems
modest given these metro areas’ strong job growth.
During the 2017.Q2 – 2018.Q2 period, Washington-
Alexandria-Arlington created 48,500 jobs, while
New York-Newark-Jersey City created an average of
51,500 jobs per year. However, the entry of Amazon is
expected to spur the clustering of additional business
establishments in the region, leading to additional
jobs beyond the 25,000 Amazon jobs per metro area.

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 COMMERCIAL REAL ESTATE

OUTLOOK
Economy
Exhibit 4.1: U.S. ECONOMIC OUTLOOK — November 2018
Given the year-to-date growth, NAR forecasts
economic output to expand at a stronger pace of 3.1
percent in 2018. This forecast factors in the 2016 2017 2018 2019
increased consumer and investment spending Annual Growth Rate, %
arising from the tax changes under the Tax Cuts Real GDP 1.6 2.2 3.1 2.7
and Jobs Act, which includes a reduction in the Nonfarm Payroll Employment 1.8 1.6 1.7 1.5
corporate tax rate from 35 percent to 21 percent. Consumer Prices 1.3 2.1 2.3 2.6
Payroll employment is projected to increase 1.7 Level
percent for the year, which would push the Consumer Confidence 100 121 129 128
unemployment rate down to 3.9 percent. Inflation is Percent
expected to rise to 2.3 percent in 2018 as the Unemployment 4.9 4.4 3.9 4.0
economy continues to reach its full capacity and as Fed Funds Rate 0.4 1.0 1.8 2.7
oil prices continue to recover. 3-Month T-bill Rate 0.3 1.0 2.0 2.9
Prime Rate 3.5 4.1 4.9 5.8
NAR forecasts the prime rate to hit 4.9 percent and 10-Year Gov’t Bond 1.8 2.3 3.0 3.6
30-Year Gov’t Bond 2.6 2.9 3.2 3.8
the 30-year government bond rate to move up to 3.2
percent for the year. Under tighter monetary, NAR
expects GDP growth to ease to 2.7 percent in 2019. Source: National Association of REALTORS®

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 15

 COMMERCIAL REAL ESTATE

OUTLOOK
Commercial Real Estate

Exhibit 4.2: Commercial Real Estate Vacancy Forecast (%)

2017.Q32017.Q42018.Q12018.Q22018.Q32018.Q42019.Q12019.Q22019.Q32019.Q42020.Q12020.Q2 2017 2018 2019
Office 12.7 12.0 12.7 12.4 12.9 13.7 13.2 13.1 13.1 13.1 13.1 13.2 12.8 12.9 13.1
Industrial 8.9 7.8 7.4 7.7 6.8 7.3 7.3 7.0 6.7 6.4 6.2 6.0 8.8 7.3 6.8
Retail 12.1 11.4 12.0 12.0 12.6 12.7 12.8 12.8 13.1 13.4 13.6 13.8 11.8 12.3 13.0
Multifamily 5.3 5.0 5.5 6.1 6.2 6.4 6.3 6.3 6.4 6.5 6.7 6.9 5.5 6.0 6.4
Source: National Association of REALTORS®

As economic activity remains positive, commercial

leasing fundamentals are expected to maintain their
trajectory this year. Vacancy rates will likely provide
mixed results, while cash flows should continue
rising. Office and retail properties will likely see
vacancies move sideways, while industrial spaces
will find rent growth advancing at a steady pace.

On the investment side, continued increases in

interest rates are expected to maintain upward
pressure on investment yields. The Federal
Reserve’s Chairman Powell signaled a moderation
in the tempo of the funds rate hikes, but remained
committed to unwinding its balance sheet and
addressing inflationary concerns in 2019.

NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.nar.realtor/research-and-statistics 16

 COMMERCIAL REAL ESTATE

OUTLOOK

The National Association of REALTORS®, “The Voice for Real Estate,” is America’s largest trade
association, representing 1.3 million members, including NAR’s institutes, societies and
councils, involved in all aspects of the real estate industry. NAR membership includes brokers,
salespeople, property managers, appraisers, counselors and others engaged in both residential
and commercial real estate. The term REALTOR® is a registered collective membership mark
that identifies a real estate professional who is a member of the National Association of
REALTORS® and subscribes to its strict Code of Ethics. Working for America's property owners,
the National Association provides a facility for professional development, research and
exchange of information among its members and to the public and government for the purpose
of preserving the free enterprise system and the right to own real property.

NATIONAL ASSOCIATION OF REALTORS®

RESEARCH GROUP

The Mission of the NATIONAL ASSOCIATION OF REALTORS® Research Group is to produce

timely, data-driven market analysis and authoritative business intelligence to serve members,
and inform consumers, policymakers and the media in a professional and accessible manner.

To find out about other products from NAR’s Research, visit

www.nar.realtor/research-and-statistics

NATIONAL ASSOCIATION OF REALTORS®

RESEARCH GROUP
500 New Jersey Avenue, NW
Washington, DC 20001
202.383.1000
COMMERCIAL REAL ESTATE OUTLOOK | 2018.Q4