The improving economy should bring a decline in vacancy rates among the major commercial property sectors aside from multifamily in 2016. But according to the National Association of Realtors, that decline will be accompanied by a dip in prices.
Lawrence Yun, the NAR’s chief economist, attributed slowed growth in the third quarter to the following factors:
- Temporary turbulence in financial markets
- A stronger U.S. dollar that hurt exports
- Economic weakness overseas
Those factors are expected to be less of an issue going forward. That has led to optimism related to vacancy rates commercial spaces.
Yun is not as optimistic for the future of multifamily housing. He recently told GlobeSt.com that: the best days for multifamily could be winding down….new construction has already surpassed historical averages. States in the South and West could see the largest rise in multifamily housing vacancy rates.
Prices to fall with vacancy rates?
The NAR predicts prices to drop in 2016 as the Federal Reserve begins to raise interest rates to match the improving economy.
Yun said that in recent years, rising sales and optimism among investors has pushed prices higher than usual in many large commercial markets. As a result, investors looking to gain an advantage turn a profit could begin to seek out smaller markets or lower-end properties.
At the same time, Moody’s Analytics has reported long-term findings that indicate while pricing on the East and West coasts will cool by 2020, markets in the heartland and Southeast are poised to see price increases. That includes undervalued markets like Atlanta, Jacksonville, Chicago and areas of Ohio.
It will be interesting to see whether one (or both) of these trends changes at all in the coming year.
Are cities that never sleep being replaced in popularity by cities that know when to take a break? To an extent, according to the 2016 ULI Emerging Trends Report, which indicates some real estate investors are starting to favor 18-hour cities over their 24-hour gateway counterparts.
San Diego is an 18-hour city that is gaining popularity.
Secondary markets are becoming more attractive as global and domestic investors look for new opportunities. These markets, such as Austin, Denver, San Diego, and San Antonio, offer the benefits of large urban areas at a lower cost. Plus, they are often considered “cool,” which makes them unique and creates a quality of life that attracts a good work force.
This builds on a trend highlighted by Emerging Trends in 2014 and is supported by three major points:
- Stronger macroeconomic performance in the U.S. has helped absorption and improved occupancy in most American markets.
- Real estate investors are becoming bold as they find themselves in a better position to take on additional risk.
- More data on secondary markets is available than ever before, giving investors peace of mind when considering investment opportunities.
It’s unclear whether an economic downturn would hurt the investor interest that 18-hour cities have generated. History suggests that these markets are more volatile than gateway cities, but there are positive factors that could make 18-hour cities a viable option for the future:
- Capital markets have been careful about funding new development
- Investors have become smarter, focusing on precise areas or neighborhoods in a market.
Look for 18-hour cities to continue gaining momentum in 2016. Check out the full ULI report here.
Nov. 27, 2015
Everyone knows brick and mortar retailers are dying off and the only thing that can save them is e-commerce, right? Not so fast, according to a story from Bloomberg.com that reveals that e-commerce sales at companies such as WalMart, Nordstrom, Gap and JCPenney have slowed.
That news comes despite an increase in money spent to improve online sales, as many retailers are investing heavily in flashy new websites and spending billions on delivery infrastructure. That hasn’t necessarily translated into new customers, though, calling into question the value of those investments.
Total U.S. e-commerce sales did outpace brick-and-mortar sales in the latest quarter, growing 14.1 percent compared to 3.7-percent growth for total retail sales. But those numbers can be misleading because of one giant e-commerce player — Amazon.com.
Toss out sales from the online giant, and e-commerce growth drops to 4.5 percent over the year before. That’s significantly worse than the 10.5-percent growth seen in 2011.
Consumers are moving online, but retailers still face the difficult task of convincing shoppers that their store offers something they can’t find anywhere else. It will be interesting to see which retailers thrive as the holiday shopping season begins in earnest.
What’s Ahead for Hotel Construction?
The new Four Seasons hotel in Fort Lauderdale is slated for completion in 2018
Hotel occupancy, construction and sales are approaching peak levels and 2016 could be the last strong year for this expansion cycle. Recent analysis from Marcus & Millichap and JLL provides these details:
- Room occupancy rates are near an all time high, reaching 65.6 percent by December 2015, says a recent Marcus & Millichap report.
- Room rents are on the rise, increasing 5.2% to $120.99 on average. With more tourists and business travelers occupying rooms, owners and investors are enjoying an average revenue per available room of $80. So, of course, an increase in interest is sparking near-record levels of new construction.
- Hotel sector capital markets also remained strong, with global hotel deal volume rising by 10 percent to nearly $60 billion in 2014, says JLL. Both Wall Street and Main Street are currently lending on hotels and transaction volumes could reach $68 million in 2015. See JLL’s Hotel Investment Outlook Report for more.
Caution for investors
Analysts are also warning investors to think ahead when building new hotels: assets that takes three years to build could open after the demand for hotels starts to drop again. As a result, developers are focusing on select service hotels that are less expensive and faster to build than full-service hotels:
- Courtyard by Marriott
- Holiday Inn
- Hampton Inn
These service hotels are making up a good portion of the 4,038 projects currently under construction, which will bring 507,221 new hotel rooms on the market in 2016. That may seem like a lot, but it’s a far cry from the 5,883 new hotels that came online in 2008. Also, cross-border transactions should account for one-third of deals in 2015, with the U.S., China, Singapore and the Middle East as the biggest capital exporters.
Foreign investment in industrial surged in 2015, led by investors such as GLP, which bought the IndCor portfolio.
Nov. 12, 2015
Ready for a surprise (or three)? JLL and capital markets research lead Sean Coghlan provided a few with the recently published report Commercial Real Estate Investment: 2015 and Beyond.
A few of the main points:
- The industrial market is back in a big way: YTD sales volume hit $43.2 billion by the end of Q3, a mark that is 53.9% higher than it was at the same time last year. This will be the sixth year of consecutive growth. “We did not anticipate that the industrial sector’s recovery would be as strong or as quick as it was,” Coghlan said.
- Foreign capital is big on industrial, a sector that could outperform its office counterpart: The industrial market has received $11.5 billion in foreign capital so far, and Coghlan said there’s a good chance another $7.5 billion in deals will be closed by year end. In recent years, office has reigned, but that trend looks poised to reverse.
- The multifamily sector remains strong: Factors such as millennials delaying home buying and moving to urban environments have caused the multifamily sector to outperform expectations. “There is a strong pipeline for new development, but we have also seen a pervasive rent growth that has outperformed the other sectors,” Coghlan said. YTD sales volume is nearly $96 billion.
Read the full article on GlobeSt.com.
Nov. 8, 2015
The commercial real estate market remains healthy across the U.S, but there are signs of a slowdown in one major industrial market: Houston.
Citing the persistence of lower oil and gas prices, CoStar says CRE investors are being cautious in this major Texas market. This is particularly true of the industrial market, as EastGroup Properties announced plans to reduce its holdings in Houston.
That news comes even though the Houston market has continued to improve. CoStar cites overall industrial vacancy rates as decreasing to a record low of 4.7 percent as of Sept. 30.
This CoStar story says that EastGroup is expected to sell a 232,000-square-foot business park in November, and will start to sell other Houston assets in early 2016.
How is big oil affecting CRE?
- The oil price plunge from a year ago has hurt the performance of industrial, multifamily and hotel properties more than office and retail segments.
- Publicly held REITs in each property sector are debating whether to pare their exposure to the market or shift strategies to ride out the latest cycle.
Chicago isn’t as dependent on oil and gas prices as Houston, but this development is being watched closely. Will other markets be affected? Stay tuned.
Nov. 6, 2015
Much has been made of an economic slowdown in China this year, but what remains to be seen is how — if at all — the U.S. commercial real estate market will be affected.
Cornerstone Realty Advisers recently published its Global Listed Property Review, concluding that China’s impact on the U.S. market could be minimal.
“It’s true that the slowdown has little day-to-day direct impact on the U.S. economy, certainly not U.S. real estate,” Dave Wharmby, a managing director of Cornerstone, said in this GlobeSt.com article.
Since little of the U.S. economy depends on trade with China, Wharmby said that any lag would likely be the result of cautious business owners seeing the slowdown in China as a reason to put off purchases.
Still, while the slowdown in China should be monitored, Chinese growth remains relatively strong at between 6 and 7 percent. And, Wharmby said the U.S. might actually benefit from uncertainty abroad. “From a real estate perspective, you’re certainly seeing capital flow into what are perceived as pockets of strength; London and much of the U.S. in particular.”