The office sector fundamentals are in a much stronger position at midyear 2019 than generally anticipated a year ago. A lackluster stretch of leasing activity in 2016-17 caused many to give up hope on the sector’s prospects against the backdrop of shrinking footprints by many employers. Robust leasing over the past five quarters have breathed new life into the sector and the 4-Qtr. MA of net absorption in the last two quarters have been the strongest in this recovery cycle. Technology/advertising/media/information sectors’ rapid expansion remain the biggest drivers for office demand. Vacancies are now at 12.2%, below the previous low in 2007, setting the stage for near-term rent growth. Technology driven metros dominate the list of markets with low, single-digit vacancies even as they absorb significant new supply.
*WTI Crude Oil Spot Price. Data points through end of July 2019. Change represents month-over-month change.
The outperformance of the industrial sector is either taking a pause or has run its course. After nearly seven years of above-average demand, net absorption fell below its long-term average on the first half of 2019. The slower pace of demand could be a function of trade wars impacting supply chains as well as a slower pace of deliveries. However, availabilities remain at 7.1%, near record-lows despite rising 10 bps from YE 2018. Vacancies have remained unchanged at 4.3% for four consecutive quarters. Market fundamentals for the sector are the strongest they have been since 2000. Strong fundamentals are broad-based as only five of 63 markets have availabilities in low double-digits.
Retail continues to dig itself out of the massive hole of vacant space post-GFC. Consumer spending was a bright spot in the Q2 GDP report. Along with strong labor market conditions and positive consumer sentiment, macro indicators remain supportive of retail demand. The neighborhood and community center segment makes up close to 40% of the retail universe and has the highest availabilities. But it is also the most sheltered from the negative impact of e-commerce and has shown the most improvement. Availabilities are at 8.8%, closer to where they were in 2005 compared to the other segments. Although at a lower level, the lifestyle/mall and power center segments continue to experience rising availabilities, hitting 5.3% and 7.1% respectively, due to store closures.
Sustained levels of job growth, strong household formation and a young renter cohort facing barriers to homeownership largely due to low inventory of starter homes are keeping the apartment sector stable. Even as new supply is causing concessions to be prevalent in certain submarkets, and lower mortgage rates in recent months are enticing some renters to jump into homeownership, demand remains buoyant enough to keep vacancies from rising too sharply. Delays in construction due to labor shortages are also keeping supply levels in check. The pace of rent growth in the first half of the year has softened compared to 2018 levels but remains positive and stronger-than-expected given the steady stream of supply.
The hotel sector is slowing down. Although discretionary consumer spending is holding its own, hesitant businesses, rising labor costs, and substantial construction are acting as drags. Occupancy in Q2 2019 was just above 70% while gains in ADR YoY for Q2 were a modest 1.2%. RevPAR gains were also positive at 1.1% YoY but at a significantly slower pace than 4.1% a year ago and the slowest pace since early 2010, pointing to a lack of pricing power. Almost half the metros tracked by CBRE had supply gains of 2% in Q2. At the metro level, the top demand markets were made up of secondary and tertiary non-coastal markets indicating the fragmented nature of market conditions within the sector.
Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.
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