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Apartment rents are suddenly rising faster, reversing yearlong trend
Suburban apartment market still strong, but slowing down
Landlords to see cool-down in values, but no big chill

High-Rise Landlords to see cool-down in values, but no big chill

The Chicago commercial real estate market is going strong, but its comeback isn’t complete.

Six years after the market hit bottom, an index of Chicago-area commercial property values is still about 7 percent shy of its 2007 pre-crash peak. But the price measure, tracked by Real Capital Analytics and Moody’s Analytics, rose a healthy 7.1 percent in 2016, the seventh straight annual gain for the Chicago market, fueled by a growing economy, low interest rates and an ample supply of debt.

High prices have allowed owners of apartment, office and other commercial buildings to pocket big profits by selling or refinancing their properties. While rising interest rates may cool down the market this year, Moody’s doesn’t expect it to get too chilly, forecasting another 3.5 percent gain for the index this year.

Politics are one wild card: With Donald Trump in the White House and tax and regulatory reform on Congress’ agenda, many real estate investors are uncertain about how potential policy changes could affect property values, said Jim Costello, senior vice president at New York-based Real Capital.

AR-170319965 Landlords to see cool-down in values, but no big chill
Landlords to see cool-down in values, but no big chill

Proposals to allow for faster depreciation of capital expenditures would help the industry, while an idea floating around Capitol Hill to eliminate tax deferrals on property sales would hurt, he said.

 

“Till we see the rules, (investors) are going to be a lot more cautious,” he said.

On the other hand, the growing economy should continue to boost demand for commercial space, lifting property incomes. Rising interest rates tend to depress property values, but occupancy and rent gains theoretically should help offset the impact.

Still, prices are likely to rise more slowly than they have in the past, Costello said.

“If you’re getting stronger growth in the economy, stronger job growth, that should be good for leasing,” he said. “I don’t think it will ever grow enough to give you double-digit growth” in prices.

A national index tracked by Real Capital and Moody’s increased 9.9 percent last year and is forecast to rise another 3.4 percent in 2017.

A couple of big deals over the past year illustrate the upward price trend in Chicago. Earlier this year, Chinese investor HNA Group agreed to pay almost $360 million for 181 W. Madison St., an office tower that last sold for $302 million in October 2013. In December, Chicago apartment landlord Bill O’Kane paid $225 million for Axis Apartments & Lofts, a Streeterville high-rise that traded for $188 million in February 2013.

But many properties are still worth less than they were before the crash of 2008-09. In January, after going through foreclosure, the office building at 123 N. Wacker Drive sold for $147 million, well below its 2005 sale price of $170 million.

Foreign investors have played a larger role in the U.S. commercial real estate market the past few years, one reason prices have risen and first-year returns—capitalization, or “cap,” rates in industry parlance—have dropped.

Overseas investment fell last year, but rising interest rates tend to attract money from foreign investors seeking higher returns. Whether that lifts real estate values is an open question.

“The wild card is whether further rate hikes will continue to bolster the dollar, and whether prospects of dollar strengthening will drive overseas investors into (U.S. commercial real estate) assets,” Heidi Learner, chief economist at real estate brokerage Savills Studley, said in a statement. “It’s too soon to tell whether 2017 cross-border volumes will fall again, but it’s unlikely that there will be a wave of foreign capital that will be competing with dollar investors to drive cap rates lower.”

Source: Crain’s Chicago Business, Abby Galun March 13th, 2017

Why apartment rents will keep climbing in the Chicago suburbs

Why-apartment-rents-will-keep-climbing-in-the-Chicago-suburbs Why apartment rents will keep climbing in the Chicago suburbs

As the downtown apartment market cools off, the suburbs are humming along in Goldilocks mode.

The suburban market is neither too hot nor too cold, with demand strong enough for landlords to push through moderate rent hikes—and for the market to absorb a rising supply of apartments. The median net suburban apartment rent was $1.38 per square foot in the third quarter, down from a record $1.41 in the second quarter but up from $1.33 a year earlier, a 3.8 percent increase, according to Appraisal Research Counselors, a Chicago-based consulting firm.

Suburban renters, who have endured seven years of rent increases, probably won’t get much relief anytime soon: Appraisal Research Vice President Ron DeVries expects rents to rise another 3 to 4 percent over the next 12 month

While developers are as busy in the suburbs as they have been in two decades, they haven’t gotten carried away as they have downtown, where about 8,700 apartments are expected to open over the next two years. As a result, the downtown occupancy rate has fallen to its lowest level in nearly seven years, while the suburban occupancy rate remains over 96 percent.

“The suburban market hasn’t seen the deliveries of the downtown market, so they’re really running in two directions,” DeVries said.
Why-apartment-rents-will-keep-climbing-in-the-Chicago-suburbs-1 Why apartment rents will keep climbing in the Chicago suburbs

Demand for apartments rose after the housing crash, as many people had a hard time getting a mortgage or were wary of buying a home in a shaky for-sale market. More recently, the improving job market has filled up buildings: As more renters get jobs or raises, they leave their roommates to get apartments of their own.

The suburban occupancy rate slipped to 96.1 percent, down from 97.1 percent in the second quarter and 96.7 percent in third-quarter 2015. But that’s still a historically high level: DeVries considers the market full when its occupancy rate exceeds 95 percent.

“Job growth in the (Chicago area) remains positive, albeit at a slower rate of growth,” DeVries said in an email. “There has been limited new supply added to the overall market. Because a significant percent of the population continues to prefer renting vs. owning, we expect rents to continue upward over the next couple years.”

The strong market has stirred the animal spirits, as investors have paid up for suburban apartment buildings and developers have launched dozens of projects. Suburban apartment sales have totaled $1.27 billion this year, a record, according to Appraisal Research, and 2016 isn’t even over yet.

Developers, meanwhile, have completed 2,831 apartments in the suburbs so far this year, the most in at least two decades, according to Appraisal Research. Another 2,391 are under construction.

So far, however, the supply increase hasn’t fueled fears of a glut. Though North Shore landlords have suffered slightly from overbuilding there, the suburbs cover such a vast geographical area, and the new projects have been spread out enough, to minimize the impact on the market.

That doesn’t mean the overbuilding risk has disappeared. More than 8,900 suburban apartments are in the planning phase, according to Appraisal Research. Whether they actually get built will depend on whether their developers can secure construction financing—no sure thing.

“Some of them will get financed and some of them won’t, but there’s no shortage of interest in adding to the supply,” DeVries said.

Source: Crains Chicago Business November 21, 2016 Alby Gallun

Commercial Real Estate Price Indices Post Fifth Straight Year of Growth

 

Q3 2016 Apartment Trends

  • The national vacancy rate for multifamily properties across Reis’s largest metro markets did not budge from it 4.4% in Q3 2016.
  • Close to 40,000 new units came online in Q3 2016.
  • Demand remained robust enough to absorb the amount of units that are coming online.
  • Asking and effective rents grew by 1%.
  • Year-over-year asking rents grew by 3.9% and effective rents grew by 3.8%.
  • Most expensive coastal markets’ highest priced properties are showing weakness.

 

Q3 2016 Office Trends

  • The national office vacancies remained moored flat at 16% in Q2.
  • Year-over-year office vacancies have declined 40 basis points.
  • Rents began to accelerate but fell back to its average quarterly level at .4% respectively for both asking and effective rents.
  • Year-over-year rents are seem to be healthy, pulling at 2.7% and 2.8%.
  • U.S. economy creating fewer jobs than in 2015 and 2014.
  • Upcoming November elections a determining factor for firms holding off long-term commitments.

 

Q3 2016 Retail Trends

  • Regional malls showed some improvement with vacancies declining 10 basis points to 7.8%.
  • Relatively strong asking rent growth at 0.5%; between 0.3% and 0.5% on a quarterly average asking rent growth.
  • Neighborhood and community shopping centers vacancies rising by 10 basis points ending Q3 at 10%.
  • Asking and effective rents both grew by 0.4%
  • Businesses are pulling back on capital spending and long-term investments, waiting on results of upcoming elections.

 

Q3 2016 Industrial Trends

  • Warehouse and industrial subsector vacancies remained stuck at 10.5% in Q3.
  • Year-over-year vacancies for warehouse and distribution declined by 20 basis points.
  • Asking and effective rents grew by 0.4% and 0.5% respectively, growing 2.1%-2.3% on a year over year basis.
  • Flex/RD showed more activity in Q3, falling 20 basis points to 11.4%.
  • Year-over-year Flex/RD has declined by 70 basis points.
  • Asking and effective rents grew by 0.4%, year-over-year growth in the low 2% range.
  • 75,000,000 SF of new construction for warehouse and distribution for all of 2016.

 

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Source: Reis Nov 3, 2016

The suburban market is neither too hot nor too cold, with demand strong enough for landlords to push through moderate rent hikes—and for the market to absorb a rising supply of apartments

Investor-Pays-60-million-for-Naperville-Arbors-of-Brookdale-Apartments Why apartment rents will keep climbing in the Chicago suburbs

Why apartment rents will keep climbing in the Chicago suburbs

As the downtown apartment market cools off, the suburbs are humming along.

The suburban market is neither too hot nor too cold, with demand strong enough for landlords to push through moderate rent hikes—and for the market to absorb a rising supply of apartments. The median net suburban apartment rent was $1.38 per square foot in the third quarter, down from a record $1.41 in the second quarter but up from $1.33 a year earlier, a 3.8 percent increase, according to Appraisal Research Counselors, a Chicago-based consulting firm.

Suburban renters, who have endured seven years of rent increases, probably won’t get much relief anytime soon: Appraisal Research Vice President Ron DeVries expects rents to rise another 3 to 4 percent over the next 12 months.

While developers are as busy in the suburbs as they have been in two decades, they haven’t gotten carried away as they have downtown, where about 8,700 apartments are expected to open over the next two years. As a result, the downtown occupancy rate has fallen to its lowest level in nearly seven years, while the suburban occupancy rate remains over 96 percent.

“The suburban market hasn’t seen the deliveries of the downtown market, so they’re really running in two directions,” DeVries said.

Demand for apartments rose after the housing crash, as many people had a hard time getting a mortgage or were wary of buying a home in a shaky for-sale market. More recently, the improving job market has filled up buildings: As more renters get jobs or raises, they leave their roommates to get apartments of their own.

Why-apartment-rents-will-keep-climbing-in-the-Chicago-suburbs Why apartment rents will keep climbing in the Chicago suburbsThe suburban occupancy rate slipped to 96.1 percent, down from 97.1 percent in the second quarter and 96.7 percent in third-quarter 2015. But that’s still a historically high level: DeVries considers the market full when its occupancy rate exceeds 95 percent.

“Job growth in the (Chicago area) remains positive, albeit at a slower rate of growth,” DeVries said in an email. “There has been limited new supply added to the overall market. Because a significant percent of the population continues to prefer renting vs. owning, we expect rents to continue upward over the next couple years.”

The strong market has stirred the animal spirits, as investors have paid up for suburban apartment buildings and developers have launched dozens of projects. Suburban apartment sales have totaled $1.27 billion this year, a record, according to Appraisal Research, and 2016 isn’t even over yet.

Developers, meanwhile, have completed 2,831 apartments in the suburbs so far this year, the most in at least two decades, according to Appraisal Research. Another 2,391 are under construction.

So far, however, the supply increase hasn’t fueled fears of a glut. Though North Shore landlords have suffered slightly from overbuilding there, the suburbs cover such a vast geographical area, and the new projects have been spread out enough, to minimize the impact on the market.

That doesn’t mean the overbuilding risk has disappeared. More than 8,900 suburban apartments are in the planning phase, according to Appraisal Research. Whether they actually get built will depend on whether their developers can secure construction financing—no sure thing.

“Some of them will get financed and some of them won’t, but there’s no shortage of interest in adding to the supply,” DeVries said.

Source: Crain’s Chicago Business Alby Gullun, November 21st, 2016

Q3 2015 Apartment Trends

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.

AptTrends_Q32015 Q3 2015 Apartment Trends

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.

Source: Reis by Victor Calanog on Dec 8, 2015

Q3 2015 Office Trends

National Office Market

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.

OffTrends-Q32015 Q3 2015 Office Trends
Q3 2015 Office Trends

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.

Source: REIS Victor Calanog on Dec 8, 2015

Q3 2015 Retail Trends

serveimage Q3 2015 Retail Trends

Q3 2015 Retail Trends

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.

Ret-Q32015 Q3 2015 Retail Trends

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.

Source: REIS Victor Calanog on Dec 8, 2015