The national vacancy rate was unchanged during the fourth quarter at 16.9%. This is slightly worse than the performance from last quarter, but not out of line with the performance that has persisted since the office market began to recover in mid-2011. Not since the third quarter of 2007 has the national vacancy rate declined by more than 10 basis points. For 2013, the vacancy rate fell by just 20 basis points, 10 basis points worse than the market's performance in 2012. National vacancies remain elevated at 440 basis points above the sector's cyclical low, recorded in the third quarter of 2007 before the recession began that December. Supply and demand have remained largely in balance during this recovery, accounting for the slow pace of vacancy compression.
Asking and effective rents both grew by 0.7% during the fourth quarter. This is a reversal of the trend that we have observed in recent quarters with rent growth slowing gradually. Asking and effective rents have now risen for thirteen consecutive quarters. During 2013 asking rent grew by 2.1% while effective rent grew by 2.2%. This was somewhat better than 2012's performance when asking rents grew by 1.8% while effective rents grew by 2.0%. Unfortunately, there is too much vacancy for the market to be conducive to significant rent growth. With the national vacancy rate at 16.9% and declining slowly, landlords remain unable to drive asking rents upward or pull back on lease concessions. That does not mean that rents are unable to slowly creep up - as they did in 2013 - but stronger, healthier rent growth is only possible at far lower vacancy rates such as were observed before the recession.
Apartment Sector Trends
Vacancy declined by 10 basis points during fourth quarter to 4.1%, in line with last quarter's 10 basis point decline. Over the last year the national vacancy rate has declined by 50 basis points, on par with the year-over-year rate from the last few quarters. Demand for apartments remains strong four years after the recovery began, even as construction activity has gradually been increasing. Not even the seasonal weakness normally observed during the fourth quarters of calendar years had much if any impact on the market dynamics. The national vacancy rate now stands 390 basis points below the cyclical peak of 8.0% observed right after the recession concluded in late 2009.
Asking and effective rents both grew by 0.8% during the fourth quarter. This is a minor decrease from the third quarter but still up from the lull in rent growth that the market experienced in the first half of 2013. Nevertheless, rent growth for 2013 came in below rent growth in 2012. Given the incredibly low vacancy rate, rent growth this weak is unprecedented. Normally at such a low vacancy rate, rent growth is at least 100 basis points above current growth rates on an annual basis. Although the labor market continues to convalesce, it remains far too slack for rent growth to accelerate much. In the past when the national vacancy rate fell near 4%, the economy and the labor market were stronger than they currently are. Moreover, on a nominal basis, rents are at historically high levels, which are also restraining tenants' ability to pay higher rents in many markets.
Retail Sector Trends
The national vacancy rate for neighborhood and community shopping centers declined by 10 basis points during the fourth quarter to 10.4%. This was a slight improvement versus last quarter when vacancy was unchanged, but more or less in line with the pace of improvement since the market began to recover two years ago. This performance reflects the pace of improvement in the economy and labor markets, exemplified by modest job growth and little to no income growth for most households. Although consumer activity and sentiment is ramping up, both are still clearly in transit on the road to recovery and have not yet reached their destination.
Asking rents grew by 0.4% this quarter, while effective rents grew by 0.5%. This rate of quarterly growth is the highest in the market since early to mid-2007 before the onset of the recession. For 2013 asking and effective rents both grew by 1.4%. This is roughly triple the rate of growth from 2012 and the highest annual growth rate since 2007. Though quarterly and annual rent growth remains weak, any improvement is a welcome sign for investors and developers given that the retail sector was hit especially hard during the worst recession since the 1930s.
Malls continue to be the outperformers during the retail market recovery. As of the fourth quarter mall vacancies stand at 7.9%, down 30 basis points from the third quarter, down 70 basis points during 2013, and down 150 basis points from the historical high level reached during the third quarter of 2011. Asking rents grew by 0.5% in the fourth quarter and 1.6% during 2013. This is the eleventh consecutive quarter of rent increases at the national level for regional malls.
Check back for more in-depth analysis as well as market highlights for each sector, coming soon.