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Local Vacancy Rates Set Timing of Construction Recovery

0 360 Market Intelligence

How quickly the expanding economy generates enough demand for additional building space depends on the local vacancy rates for each type of property. Vacancy rates across the country vary widely across the county with highest rates three times the lowest rates. The construction recovery will lag in a metro area with an early and strong economic recovery if building vacancy rates are above average, says Reed Construction Data chief economist Jim Haughey.

How quickly the expanding economy generates enough demand for additional building space depends on the local vacancy rates for each type of property. Vacancy rates across the country vary widely across the county with highest rates three times the lowest rates. The construction recovery will lag in a metro area with an early and strong economic recovery if building vacancy rates are above average. Boston is in this situation.

Currently, according to Property & Portfolio Research, the national commercial vacancy rate is near 20% for office and retail properties and 13% for warehouses. The hotel occupancy rate is about 58%. The collapse in occupancy is nearly over with only marginal declines expected into the summer. But the turnabout will be relatively slow. The office vacancy rate will only dip to 18% plus by the end of 2011. The office market always evolves slowly because of the long term of leases. The retail vacancy rate will fall to 17% by the end of 2011 and the warehouse vacancy rate to 10%. Hotel occupancy will rise to 60-61% by the end of next year. This is a relatively slow turnaround because of the subpar strength of the economic recovery.

Commercial vacancy rates are generally higher in the South where permitting is relatively easy and in the industrial Midwest where the deep recession has forced tenants to give up space. Vacancy rates are generally lower in the Northeast and Pacific regions where permitting is more difficult which restricted overbuilding in 2005-08. The office vacancy rate is 14% in Washington and 16% in New York City. The retail vacancy rate is 13% in New York City but over 25% in many large markets in the South. Similarly, the warehouse vacancy rate is only 8% in Los Angeles.

Highest Apartment
Vacancy Rates
  Lowest Apartment
Vacancy Rates
  Highest Metro Rental
Vacancy Rate
(75 largest metros)
  Lowest Metro Rental
Vacancy Rate
(75 largest metros)
AL 18.6   MA 4.4   Memphis 23.9   Springfield (MA) 3
MS 17.5   NY 5.7   Orlando 22.9   Bakersfield 3.3
AZ 16.6   OR 6   Dayton 22   Boston 3.7
KY 15.6   VT 6.2   Tulsa 21.7   Albany 4.1
FL 15.3   WY 6.5   Phoenix 17.9   Columbus 4.7
RI 15.3   WA 7.3   Greensboro 17.7   Honolulu 5.2
SC 15.3   NE 7.3   Atlanta 16.6   Portland (OR) 5.3
TN 14.8   AK 7.5   Akron 15.4   Albuquerque 6.1
GA 14   CA 7.9   New Orleans 15.3   NY 6.2
IL 13.7   CT 8.2   Chicago 15.1   Buffalo 6.4
  Houston 14.7   Oklahoma City 6.4
Source: Census Bureau

The national apartment vacancy rate was 10.7% at the end of 2009, down from 11.1% earlier in the year but above the 10.1% rate a year ago. Vacancies are high but declining. The vacancy rate averaged 9.9% from 2003-07 so this is likely the equilibrium rate. Note that the market equilibrium rate has drifted up from 5% in 1980. By state the apartment vacancy rate ranges from 4.4% in Massachusetts to 18.6% in Alabama where permitting is much easier and expectations for population growth are much higher. Alabama also had a more severe recession than Massachusetts.

Vacancy rates for homeowner properties are much lower at 2.7% but this is well above the market equilibrium rate or 1-7-1.8%. In the previous two recessions the homeowner vacancy rate never topped 1.9%. The reported rate is an underestimate because of the large number of vacant homes not listed either for sale or rent because then owner is holding the property until home prices increase substantially. The vacancy rate varies from 0.7% in South Dakota which largely avoided the recession and where residents move less frequently to 4.3% in recession ravaged Nevada where the churning of residents is very high.

Highest Homeowner
Vacancy Rate
  Lowest Homeowner
Vacancy Rate
  Highest Metro Homeowner
Vacancy Rate
(75 largest metros)
  Lowest Metro Homeowner
Vacancy Rate
(75 largest metros)
NV 4.3   SD 0.7   Baton rouge 6.9   Worcester 0.4
FL 4.1   NM 0.9   Columbia (SC) 5.9   Rochester 0.5
SC 4   ND 1   Cincinnati 5.8   Springfield (MA) 0.6
OR 4   MA 1.1   Charlotte 5.7   Richmond 0.7
MI 3.8   VT 1.4   Greensboro 5.6   Alburquerque 0.7
DC 3.8   WY 1.4   Orlando 5.5   Birmingham 1
AZ 3.7   NH 1.5   Portland (OR) 4.8   Jacksonville 1.2
OH 3.6   PA 1.5   Tampa 4.6   Los Angeles 1.2
MS 3.4   CT 1.6   Las Vegas 4.4   Hartford 1.3
      ME 1.6   Atlanta 3.8   San Antonio 1.3
Source: Census Bureau

by Jim Haughey

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