Q3 2015 Apartment Trends – After holding steady at 4.2 percent for the first two quarters of 2015, the national vacancy rate rose by 10 basis points to 4.3 percent during the third quarter. We have been expecting that vacancies would rise given the amount of new supply coming online. Vacancies have been bouncing around at these levels for the last two years, with a similar 10 basis point increase in the third quarter of 2014 (only to fall once again at the start of 2015). Overall, market fundamentals remain tight.
Asking and effective rent growth was very impressive, rising by 1.4 and 1.5 percent respectively. On a year-over-year basis, asking rents rose by 4.2 percent, and effective rents rose by 4.3 percent. These are robust figures, strong enough to fuel the hopes of optimists banking on resilient rent growth even if occupancies stay flat or deteriorate. For perspective, apartment rent growth has not been this strong (on a year-over-year basis) since 2007.
Supply and Demand Trends
Over 40,000 units were brought to market during the third quarter, which is less than the second quarter figure; yet – vacancies rose. It is only in retrospect that we will be able to proclaim this third quarter rise in vacancy as a true inflection point, but if the market is showing signs of being unable to absorb 40,000 units of new construction, what will happen when close to 100,000 units come online over the next quarter or two, as our latest projections show? Fundamentals remain tight, but it will be interesting to see where the intersection of demand and supply plays out over the next few quarters.
We expect national vacancies to rise modestly over the next few years, but we’re not very worried about the multifamily sector if these projections come to pass – vacancies will be in the low to mid 5s by 2019, which doesn’t portend lean times ahead.
Q3 2015 Office Trends: Office vacancies fell by 10 basis points to 16.5 percent in the third quarter, after holding steady at 16.6 percent for the first half of the year. The sector is treading a familiar path of a sluggish downward trend in vacancies, which began in late 2010 after the vacancy rate peaked at 17.6 percent.
Given how monthly job growth has actually been weaker in 2015 relative to 2014’s monthly average, this is fairly impressive. Aided by very constrained levels of supply growth, absorption and construction have mostly kept pace, and asking and effective rents also continued their march upwards, albeit at a modest pace.
Asking and effective rents grew by 0.6 and 0.7 percent respectively during the third quarter, marking the twentieth consecutive quarter of asking and effective rent growth. These growth rates are more or less in line with the growth rates from last quarter. However, even though quarterly rent growth did not accelerate, year-over-year rental growth rates for both asking and effective rents did accelerate. Effective rent growth of 3.5 percent is quite strong for a property type with a relatively elevated vacancy rate. We are on track for a 30 basis point decline in vacancies for 2015, the strongest showing for the sector since 2012.
Supply and Demand Trends
Very slowly, the recovery in the Office market is gathering pace (as contradictory as that sounds). 2015 is shaping up to be the best year for demand for office space (as measured by net absorption) since 2007, before the recession.
Year-to-date figures for most metrics are already well ahead of last year. Because the improvement in the Office market has been so gradual, it has largely gone unnoticed by many in the industry. However, improvement is becoming stronger and more consistent. Unless we encounter a major downturn in the near future, this argues for better times for the office market over the next five years.
National Retail Market
On a quarterly basis, retail fundamentals have been improving only slightly. The third quarter was no different – the national vacancy rate for neighborhood and community shopping centers was once again unchanged at 10.1 percent. This marked the second consecutive quarter that vacancy was stagnant. Over the last 12 months, the national vacancy rate declined by just 20 basis points, a rather modest change for that duration of time.
Asking and effective rents both grew by 0.5 percent this quarter. This is just about on par with rent growth over the last couple of quarters. This rate of rent growth is understandable, given the relative lack of demand for these centers.
What about regional malls, the larger property type? During the third quarter, the regional mall vacancy rate was unchanged at 7.9 percent. The vacancy rate has remained essentially the same between the fourth quarter of 2013 and the third quarter of 2015. Asking rents did grow by 0.5 percent during the third quarter – year-over-year rent growth remains at its strongest since before the recession in 2007. However, this continues to be largely driven by the performance of higher end malls. Malls further down the quality spectrum are often burdened with high vacancy rates, often from unfilled anchor tenant space, preventing them from exercising pricing power over current and potential tenants.
Supply and Demand Trends
The outlook should be relatively bright for retail sales, with consumer spending still relatively healthy and benefiting from cheaper oil. However, any benefit of said brighter outlook for retail properties is likely to remain muted, given how eCommerce appears to be acting as a constraint on demand for brick and mortar space.