Armageddon on Hold for Four Quarters

  • The national vacancy rate for multifamily remained moored at 4.4% in the third quarter, unchanged since the fourth quarter of 2015 despite the large number of new deliveries.
  • This confirms what we have posited thus far about demand remaining robust even as supply growth increases. With that said, this equilibrium is tenuous and likely won’t last.
  • For markets that experienced either a large increase in rents over the last few years, or a steady influx of new buildings – or both – landlord pricing power is being tested.
  • Market conditions in the apartment market softened a bit in the third quarter, a period they generally see the highest activity and strongest rent growth.


On Pause, Those Fine Hopes for 2016

  • We started 2016 feeling fairly optimistic about the prospects of the office sector. With the national vacancy rate declining by 40 basis points last year, we were poised to finally see an acceleration in improvement in fundamentals for the office sector.
  • With national vacancies remaining stuck at 16.0% in the third quarter, it appears that optimistic hopes about the prospects of the office sector have been put on hold – at least till the fourth quarter.
  • While the numbers disappointed in the quarter, much of the decline was a lagged response to tepid employment and economic conditions in the first quarter.


Two Steps Forward, One Step Back

  • The national neighborhood and community center retail vacancy rate increased by 10 basis points during the third quarter to 10.0%; the retail mall vacancy rate decreased by 10 basis points to 7.8%.
  • Both minor changes represent a reversal in the second quarter when the neighborhood and community center vacancy rate decreased and retail mall vacancy increased, both by 10 basis points.
  • Neighborhood and community centers have lagged due to the slow growth in median household income that has kept a lid on discretionary spending over the last few years.
  • Both neighborhood and community centers and regional malls face competition from newer and fresher retail concepts as well as e-commerce.


A Downshift in Demand

  • The momentum in the industrial market slowed a bit as demand growth decelerated. Nevertheless, vacancy held steady in the warehouse and distribution sector as net absorption exceeded new construction by a small margin.
  • Although the industrial sector has outperformed other property types in terms of occupancy growth, the down-shift observed in the third quarter puts the asset class on par with office and retail which followed a similar pattern.
  • Echoing the sentiment we expressed last quarter, the slow but steady rate of growth should continue going forward as most metros continue to see demand growth for industrial space.
  • Vacancy declined in the Flex/R&D subsector largely due to a sharp drop in new construction.
  • Net absorption slowed somewhat but remained positive. Market rents increased but also at moderate rates, similar to the second quarter.
  • Once again, every metro posted positive rent growth for the quarter, although some outperformed others.


New Construction at the Cusp of Economic Change

  • The third quarter of 2016 was marked by a somewhat consistent trend – a pronounced pullback in new completions, relative to recent quarters.
  • This is readily apparent in the apartment and office sectors, but less so in neighborhood and community shopping centers where supply growth has been anemic for several years anyway.
  • What caused this pullback – especially in multifamily where we were expecting a deluge in new supply?
  • Any pickup in activity for new completions is likely to be driven by projects that are already in the pipeline, just waiting to come online in what may well be a deluge for the apartment sector in the fourth quarter.

Source: REIS

REIS Q2 2015 First Glance Commercial Real Estate Industry

REIS Q2 2015 First Glance Commercial Real Estate Industry

REIS 3rd Quarter 2015 Commercial Real Estate Sectors Overview

Apartment Trends

green-bulletMultifamily vacancies inched upward by 10 basis points in Q3 to 4.3%.
green-bulletDespite a pullback in new construction in Q3, vacancies still rose.
green-bullet100,000 new units are expected to come online over the next 6 months.
green-bulletAsking and effective rents increased by 1.4% and 1.5%, respectively.

Office Trends

green-bulletOffice vacancies hit 16.5% in Q3, down 10 basis points.
green-bulletAsking and effective rents increased by 0.6% and 0.7%, respectively.
green-bulletMuted supply growth should produce slow and steady declines in vacancy and increases in rents over the next year or two.

Retail Trends

green-bulletNeighborhood and community center vacancies remainder unchanged at 10.1%.
green-bulletAsking and effective rents increased by 0.5% for neighborhood and community centers.
green-bulletClass A malls also stalled; vacancies didn’t move from 7.9%.
green-bulletMuted new supply coming online has balanced tepid demand for this property type.

Industrial Trends

green-bulletIndustrial properties outperformed most other property types.
green-bulletWarehouse/distribution vacancies fell 10 basis point to 10.7% in Q3.
green-bulletAsking and effective rents rose by 0.4%.
green-bulletFlex/R&D vacancies fell by 20 bps to 12.1%.
green-bulletAsking and effective rents grew by 0.3% and 0.4%, respectively.

New Construction Trends

green-bulletNew completions for each of the major property types changed relatively little versus last quarter, a sign that construction is firming.
green-bulletSurprisingly, Retail was the only sector that experienced an increase versus last quarter.
green-bulletThe Apartment and Office sectors registered declines.

CBC Reis Q3

REIS Q3 National Office Industrial Retail Multifamily Summary

REIS has recently released its Preliminary Trends Announcement for Third Quarter 2014 Findings in the National Office, Apartment, and Retail Sectors. The findings are consistent with what was presented at the 2014 CBC Global conference three weeks ago. Listed below is a brief summary of the report.

Tailwinds – According to REIS, the end of 2014 remains optimistic in three of the last four quarters. GDP has grown between 3.5% and 4.5% overcoming the slow start.

Average monthly job gains are 220,000 per month, which is well ahead of last year’s pace.

Office – Vacancy remains the same at 16.8%. Asking and effective rents have grown over the past year at 2.5% +/-. If employment continues to decrease, a downward pressure on vacancy will be seen.

Apartment Sector – Vacancy increased 10 basis points to 4.2%. This is due to new units coming on line to meet demand. REIS does not expect the vacancy to rise above 5% before 2018. Rent increases have averaged 3.2% YOY. Demand will continue to absorb units and therefore the rate of vacancy increase will be slow.

Retail – Vacancy has remained unchanged at 10.3% for neighborhood and community centers.

The same holds for regional malls which holds at 7.9%. Reflecting the supply situation asking and effective rents have increased an average of 1.8%.

Industrial – Vacancy on Warehouse and Distribution through Q2 is down 2 basis points to 11.2%. Demand continues to improve, driven by supply chain and order fulfillment.

By Fred Schmidt, President & COO, Coldwell Banker Commercial Affiliates