Ten years into the recovery the office sector is well positioned with the lowest vacancy since mid-2001 at 12.1%, declining 30 bps over the past year. Sustained demand from technology companies was the dominant theme for 2019 though the financial services and coworking sectors were active as well. Although the last quarter 2019 was dominated by negative headlines about WeWork, coworking did lift leasing activity in the first three quarters of the year. Traditional tech hubs, gateway metros and Sunbelt markets led the top 10 list for most absorption. Heading into 2020, the key story is the continued migration of tenants to state-of-the-art buildings in vibrant neighborhoods, as much older stock suffers from obsolescence.
*WTI Crude Oil Spot Price. Data points through end of January 2020. Change represents month-over-month change.
Although still above its long-term average, net absorption in 2019 for the industrial sector dipped below completions for the first time in a decade. The availability rate moved up marginally by 20 bps to 7.2% by YE 2019 as new supply remained elevated. Despite that increase, rents continued to climb, though at a slightly slower pace than prior years. There is still a robust supply pipeline in the works that will likely keep the availability rate from improving further from its current generational lows. At the same time, anticipated slower global growth and trade activity are forecast to dampen demand. Consumer sentiment and expanding e-commerce and urban distribution networks remain positive tailwinds for the sector.
Changing consumer behavior and disruptive technology continue to transform the retail sector. Job gains and the healthy housing sector boosted consumer sentiment towards the end of the year supporting holiday sales. That translated into decent demand levels which, combined with extremely low supply levels, resulted in availability rates declining. Availability rates for the overall retail sector have been gradually declining since 2009 and at 6.1% are currently the lowest they have been since 2005. Much of the decline in the sector is led by neighborhood centers where availability rates compressed 40 bps over 2019 to 8.6%. At 5.4% and 7.0% respectively, malls/lifestyle centers and power centers have lower availabilities than neighborhood centers but have remained stagnant in recent years as they have been impacted by store closures.
The apartment sector’s supply-demand dynamics were in balance for 2019. The demand story remains positive thanks to solid job gains, the demographic tailwinds and difficulty in accessing affordable, entry-level for-sale housing for young households. Development remains active but construction delays due to labor shortages are commonplace pushing more deliveries into 2020. This has helped keep vacancies in the mid-4% range for a few years while rent growth has been strong and above inflation. Coastal metros with expensive for-sale housing and sunbelt metros are the leading rent growth markets. Supply levels are anticipated to be elvated through 2021 and are expected to coincide with slowing demand, leading to higher vacancies and a slower pace of rent increases going forward.
The hotel sector had a record year in 2019 in terms of rooms available, rooms sold and room revenue. On a YoY basis, supply and demand increased at about 2% while occupancy compared to 2018 was essentially flat at 66.1%. The absolute ADR and RevPAR values were the highest recorded, but growth has slowed to a crawl. With supply and demand growing in equilibrium, ADR is the sole driver of RevPAR gains. Since ADR is increasing below the rate of inflation, revenue growth is not keeping up with rising costs, such as wage increases. The current industry growth cycle is the longest since the 1990s and supply has ramped up. New deliveries will remain particularly challenging in the limited-service segment and in certain major markets.
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.
Copyright © 2019, CBRE Global Investors, LLC. All rights reserved.