Commercial Real Estate Sector Outlook
JM Padron, CCIM, MRICS September 1, 2016
The ULI Consensus Forecast anticipates continued commercial price appreciation and positive returns, but at more subdued and decelerating rates; above-average but lower rent growth rates in all property sectors; and better than average vacancy rates in all sectors, except for retail.
Retail. Economists see retail as a bit of an exception in the broader industry forecast. Vacancies have been improving since peaking in 2011 at 13.1 percent and are expected to decline to 10.9 percent this year. However, those vacancies remain elevated, which is expected to produce below-average rent growth, according to ULI's forecast. Retail also remains a divided market. “Some of the best centers are full with great rent growth and they are just cashing in. Meanwhile, there are other centers that are really struggling; all depends of course on location and tenant mix. The fact is that there are many more retail center doing above average than the ones doing below average, says JM Padron, CCIM, MRICS principal at RE/MAX Commercial Associates
Industrial. The industrial sector has been holding its ground against headwinds that include a strong dollar, which is negatively affecting export volumes. Vacancy rates for warehouse and distribution space are expected to decline 40 basis points this year to 10.2 percent, according to Reis. During 1Q16, effective rents increased to an average of $4.57 per square foot, which is up 0.6 percent compared to 4Q15 and 2.1 percent over 1Q15. Industrial has benefited from a rise in retail sales and growth in e-commerce, which drives demand for storage and distribution facilities. In addition, the sector could get a bigger boost from a rebound in home building. New home construction creates demand for items ranging from flooring and windows to appliances and furniture, which will help the manufacturing sector and also buoy warehousing demand. New construction during first quarter totaled 16.9 million square feet following the 19.3 million sf that was completed in fourth quarter, according to Reis.
Office. Office will continue to see a solid increase in demand and steady absorption, with more activity in the best CBD and best suburban locations. Vacancies dropped 20 bps in 1Q16 to 16.0 percent, according to Reis. The firm is predicting that vacancies will remain relatively flat this year with a slight decline to 15.9 percent by year-end. The lack of new construction has been a big help in an otherwise tepid office market recovery. Roughly 6 million sf of new office space came on line in 1Q16, which is slightly less than the 6.2 million sf that was completed in 1Q15, according to Reis. However, those deliveries will increase in 2017, and that is already starting to affect rents as tenants commit to leases in those new buildings.
Multifamily. By the numbers, multifamily remains a stellar performer with vacancies below 5 percent. Yet the building boom occurring in some metros is starting to create some softness in the market with new supply exceeding demand, particularly in the high-end, class A segment of the market. Vacancy rates ticked slightly higher to 4.5 percent in 1Q16, and Reis is predicting that rates will rise another 20 bps this year to 4.7 percent. So much more new supply is coming online than demand can fill, so rent growth will move forward at a much slower rate, she adds. Rent growth that was 5 percent in 2015 is expected to decline steadily to 3.5 percent over the next couple of years.
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