The recent performance of the office sector has been a welcome relief after an extended stretch of tepid absorption and rent growth trends through much of 2016-17. Absorption levels have rebounded over the last four quarters as tax cuts and a strong labor market have boosted expansion efforts by tenants. Those especially in tech, finance and coworking have lowered vacancies to 12.5%, 50 bps lower than a year ago and within 10 bps of its prior trough in mid-2007. Asking rents (gross and net) jumped up in Q1 2019 as market conditions tightened more than anticipated and newer space commanded higher rents. There is also a robust pipeline of deliveries that will shift the dynamics in favor of tenants but for now, landlords have the upper hand. Western U.S. markets were the predominant outperformers and about 15 metros now have vacancies in the single-digits.
*WTI Crude Oil Spot Price. Data points through end of April 2019. Change represents month-over-month change.
The outperformance of the industrial sector remains enduring. Going on 36 quarters of positive absorption, market fundamentals for the sector are the strongest they have been since 2000. Vacancies have been in the 4% range for three years, quite remarkable given the supply response that has been in high gear for over five years now. Persistently low vacancies continue to push rents though the pace of growth has decelerated in recent months. E-commerce is the driving force in leasing across the country, gobbling up space as quickly as it delivers. Demand for warehouse space has been highly concentrated in the five mega-distribution hubs – Atlanta, LA/Riverside, Chicago, New York/NJ and Dallas/Fort Worth.
The resiliency of the retail sector is constantly being tested with each segment reacting differently to the persistently increasing role of e-commerce. The neighborhood and community shopping center category, the bulk of the retail stock, continues to show modest improvement in demand and rent growth. Its availability rate fell below 9% in Q1 2019. The lifestyle and mall segment also improved steadily, though store closures are a significant problem in many secondary and Class B malls. The power center segment is the most impacted by store closures and continues to struggle with rising vacancies. However, consumer fundamentals are strong supported by a strong labor market, rising wages, and tax cuts which should bode well for near term momentum.
The apartment sector remains in good overall health as the supply challenge has been met with solid demand and positive rent growth which has surprised to the upside. Strong job growth and household formation, plus headwinds to homeownership and delayed construction are helping keep the sector afloat. Developers are still active despite an extended construction cycle as vacancies are still sub-5% and well below long-term averages. Permit issuance picked up the pace again in 2018 which means that the anticipated slowdown in construction after 2019 may be a more distant mirage. New supply is unleashing concessions and negatively impacting NOI growth in certain infill submarkets in major metros which have witnessed robust supply pipelines.
The hotel sector’s performance in early 2019 has softened from a year ago. Occupancy in Q1 2019 was 61.8%, up 40 bps from a year ago as demand from domestic and business travelers remained on a positive trajectory and outpaced supply by just a little bit. However, gains in ADR YoY for Q4 were a modest 1.1%, the slowest YoY growth rate since Q2 2010. RevPAR gains were also positive at 1.5% YoY but the slowest since early 2010. On the supply side, approximately 201,000 rooms were under construction in March 2019, up nearly 8% YoY. At the metro level, the top demand markets were made up of secondary and tertiary non-coastal markets indicating the broad-based nature of market conditions. San Francisco had the highest YoY growth in ADR and RevPAR with no gains in occupancy as tech industry growth continues to strengthen. It was followed by Atlanta, host of Super Bowl LIII.
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