Many commercial real estate investors have come to expect quarterly declines in national vacancy. But fresh research from Property & Portfolio Research (PPR) finds that national vacancy declines across the board were meager at best during the first quarter. Perhaps even more troubling for commercial real estate investors and landlords: The pace of new supply pouring into nearly all property sectors — notably apartments — continues to ramp up.

Only the national office and apartment markets managed to eke out slight vacancy declines between the end of December and March. Office vacancy registered 14.9% by the close of the first quarter, down from 15% at year-end 2006. Ditto for the apartment market where vacancy fell from 5.8% to 5.7% during that period.

Even these improving office and apartment vacancy rates were billed as “unspectacular” by PPR. Nor did the other property classes fare nearly as well. Warehouse vacancies remained flat since year-end 2006, and retail vacancies actually climbed by 0.2% in the first quarter.

“The economy clearly downshifted in the first quarter,” says economist Ken McCarthy, managing director of research at Manhattan-based Cushman & Wakefield. First quarter gross domestic product (GDP) registered 1.3%, which was below most economists’ late 2006 expectations. The same quarter in 2006 saw GDP of 4.8%.

McCarthy says that the weak housing market is being felt in the broader economy, particularly in the most recent quarter. But he cautions that one quarter of economic sluggishness (combined with stubbornly shallow vacancy declines) could also be a temporary fluke. “I believe that the economy is setting itself up for a stronger second half of the year,” he says, citing low unemployment and rising incomes as two leading indicators of growth.

Much of that growth should boost the office market, too. PPR expects office vacancy to continually decline during the next four years. Office vacancy at the end of 2011 should register lower than 15%, where it stood at the end of 2006.

The national retail market, however, will end 2011 nearly two full percentage points above current levels. As for warehouse and apartment vacancies, these should remain flat over the next four years. PPR does expect apartment vacancies to surge in the outer years of the forecast, primarily due to spiking levels of new construction.

“Developers try to anticipate growth, and they are clearly better at doing that today than they were in the past,” says McCarthy.

Every property class except warehouse will be hit with added supply in 2007. In the apartment market, where the condominium conversion wave has broken, net apartment completions will rise tenfold from roughly 10,000 units in 2006 to more than 107,000 units this year. It gets even more interesting in 2008, reports PPR: Net apartment completions should rise another 25% to 134,000 units.

Office developers will also be active during that period. Net completions of nearly 91 million sq. ft. in 2007 will exceed the 2006 volume by roughly 10%, and year-over-year completions will jump another 15% in 2008. Retail construction will also escalate this year as 150 million sq. ft. are completed, up 9% from 2006. One piece of good news for retail investors is that developers should curb new construction in 2008, notching just under 130 million sq. ft. that year.

And what about rental growth going forward? Since rents typically lag vacancy gains, landlords across the property types have largely boosted their rents in the past year. Office owners led the way, bringing average effective rents up by 5.9% during the 12-month period ending in March. Apartment rents jumped by 5.4% through that span, and even the retail and warehouse markets boosted rents by 4.2%.

Rent growth, however, has peaked across the board, according to the report. “Office will remain the leader over the next 12 months with growth of 5.4%. [And] retail will see the biggest pullback in rent growth as economic vacancies continue to rise.”