The national office sector continues moving to balanced conditions. Healthy leasing activity, positive rent growth and a growing emphasis on flexibility driven by tenants’ evolving needs has kept the momentum going. Broad-based macroeconomic growh are supporting continued improvement in market fundamentals. Although business sentiment has taken a hit following a particularly volatile fourth quarter for equities, it is yet to show up in leasing activity. The vacancy rate declined by 40 basis points in 2018 to 12.6%, 20 bps lower than its prior cyclical trough in mid-2007. Strong net absorption levels of over 58 million sf – the second best showing in the last nine-years – significantly outpaced new supply. At the same time, newly delivered space is giving tenants increased flexibility and leverage as landlords of older product scramble to make improvements to keep their buildings relevant.
*WTI Crude Oil Spot Price. Data points through end of January 2019. Change represents month-over-month change.
The U.S. industrial sector maintained the solid momentum of the past several years into 2018. Net absorption posted another robust performance, close to 230 million sf for the year and staying well ahead of new supply. The availability rate fell 30 bps over the last four quarters to 7.0%, 270 bps lower than its prior cyclical low in mid-2007. Despite a heavy construction pipeline, strong pre-leasing trends in the newly-built industrial product have helped keep the availability levels stable – quite the feat for a sector that can generate a quick supply response. Over 43% of construction is concentrated in five markets – Chicago, DFW, Atlanta, Houston and Riverside. Trade wars have yet to make a meaningful impact as fundamentals are healthy and rent growth registered another good year.
Retail has always been the sector that needs to evolve with changing fashions and 2018 was no different. The neighborhood and community shopping centers segment’s fundamentals rebounded from the setbacks from the year prior and availability declined back to 9.0%. Retail spending is on an upward trajectory thanks to a solid job market, rising wages and confident consumers, even as higher prices and high rents eat into disposable incomes. The Christmas shopping season was one of the strongest in six years according to Mastercard data. Demand continues to handily outpace supply as developers shy taway from the sector. Lifestyle centers and malls, as well as power centers, have lower availabilities at around 5.3% and 6.9% respectively, but are struggling with negative absorption and rising availabilities in the last two years. However, well located and conceived centers continues to head in the right direction at a slow but steady pace.
Demand for apartments was impressive in 2018 even as supply surges dominated headlines. The tailwinds of an energized labor market and favorable demographics were given an additional boost by a for-sale housing market that is low on inventory and high on prices and mortgage rates, effectively locking out many buyers. Permit activity in 2018 also picked up a little momentum indicating that the anticipated slowdown in construction after 2019 may not be as meaningful and supply could remain an ongoing concern. Many urban/infill locations are oversupplied, concessions are common and investors are adjusting their pricing expectations. Suburban locations that are proximate to employment, retail and transit are gaining favor as rents in downtown luxury high-rises have soared. Overall sector vacancies are creeping up slower than many expected, held at bay by construction delays and a strong bump in demand in 2018.
The hotel sector’s fundamentals rebounded overall in 2018 with the last quarter building on the momentum set in the first half of 2018. Occupancy in Q4 2018 increased by 40 bps year-over-year as confident consumers spent more on travel. Gains in ADR YoY remained modest at 2.0%, 50 bps lower than the growth witnessed in the same quarter last year. RevPAR continued to grow as well at 2.4%, but slower than above 4% rate witnessed during the same time last year. After seeing a significant deceleration, San Diego produced the largest RevPAR growth in the nation, north of 12%, driven by strong ADR gains. Within the top ten markets for RevPAR growth, eight were driven by occupancy gains, a pick up from only six markets in the previous quarter.
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