Why Secondary Cities Are Pulling Ahead

Photo by Jacques GAIMARD from Pixabay.com.

Half of the strongest office markets were in Florida and Texas during the third quarter, with several secondary markets making the list, according to the National Association of Realtors’ latest Commercial Market Insights report.

NAR identified 10 metros with the best market conditions as of the third quarter. The secondary markets, with relatively affordable commercial and residential prices, are benefiting from in-migration, while large urban markets continue to struggle and many of their offices are still largely unoccupied due to the pandemic.

In alphabetical order, the top markets are: Austin, Texas; Boise, Idaho; Chattanooga, Tenn.; Daytona Beach, Fla.; Miami; Myrtle Beach, S.C.; Omaha, Neb.; Palm Beach, Fla.; Provo, Utah; and San Antonio, Texas.

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NAR compared 10 local indicators to national figures in 390 commercial real estate markets including vacancy rate, 12-month net absorption, year-over-year rent growth, leasing volume, cap rate and sales transactions in both square feet and dollars. The report notes several small- and medium-sized metropolitan areas are seeing increases in office occupancy rates that are outperforming most large cities and the national average.

NAR Chief Economist Lawrence Yun said in a prepared statement the office market is the one real estate sector that is still lagging behind, even as the economy continues to make a steady recovery. Yun said work-from-home flexibility could be the defining shift of the post-pandemic economy. However, Yun pointed to some markets that are seeing more office occupancy and rising rents. He said a combination of strong in-migration and a relatively lower cost of doing business is driving the growth in those markets.

The NAR third-quarter report found the primary office markets are beginning a slow recovery with New York, Atlanta, Dallas and Seattle experiencing positive net absorption of office space in the third quarter. Due to the huge losses in office occupancy, office vacancy rates will likely remain above 10 percent for the next two years. The report stated 144.4 million square feet of office space has lost occupancy since the second quarter of 2020. The office vacancy rate increased from 9.8 percent in the first quarter of 2020 to 12.4 percent as of Aug. 22.

Industrial strength

The NAR third-quarter report said positive net absorption of industrial space more than offset the negative net absorption of office space during the same period. In the industrial market, 518.8 million square feet of space has been absorbed since the second quarter of 2020. The industrial vacancy rate has fallen from 5.3 percent in the first quarter of 2020 to 4.6 percent as of Sept. 19.

The report states the industrial market absorbed 113 million square feet in the second quarter of 2021—the most space ever absorbed in a single quarter. Still, demand continues to outpace supply, NAR noted, even with new supply totaling 190.1 million square feet delivering since the beginning of the year. Markets with positive net absorption for the past 12 months included Dallas-Fort Worth; Chicago; Atlanta; Phoenix; Houston; Los Angeles; Indianapolis; Memphis, Tenn.; Columbus, Ohio, and the Inland Empire in California.

The industrial sector also saw rising rents while office rates fell. The average asking rent per square foot for the industrial market rose 6.9 percent, higher than the 5 percent increase seen prior to the pandemic. The average asking rent in the office sector was down by 0.4 percent year-over-year, compared to 2.8 percent before the pandemic. However, the NAR report states that office rents are up on a year-over-year basis in 365 of 380 metro areas.

Secondary and tertiary office markets that are seeing rent increases include Tucson, Ariz. (6.2 percent), Providence, R.I., (6 percent), Naples, Fla. (5.6 percent), Fort Myers, Fla. (5.3 percent) and Las Vegas (4.9 percent). Decreases in large markets like San Francisco (down 4.4 percent) and New York (down 2.8 percent) continue to pull down the national average rent rates.

Read the full report by the National Association of Realtors.