Nine years into the recovery, the office sector has re-gained much of its pre-GFC health. Absorption for the first three quarters of 2018 was more than 37 million sf, close to the entire 2017 absorption. The vacancy rate fell to 12.8%, its lowest point since Q4 2007. Of the top five highest absorption metros, San Francisco, San Jose and Denver’s spectacular performance was noteworthy due to the relatively small size of their office stock. The voracious appetitie for space by tech companies pushed these metros to the top. Rent growth remains positive but has slowed down in recent quarters after a strong run-up in the last five years and increasing new supply. Despite a strong rent recovery and a sub-13% vacancy rate, the supply response has not over-reached. This has kept the sector fundamentals in balance so far.
*WTI Crude Oil Spot Price. Data points through end of October 2018. Change represents month-over-month change.
Fueled by steady economic growth and investments in the supply chain, demand for logistics space shows no signs of abating. Absorption through Q3 2018 was nearly 166 million sf, tracking close to 2017 levels, more than offseting rising construction, maintaining downward pressure on availability rates and boosting rent growth. Availability rates have fallen to 7.1%, just 50 bps above its historic low in 2000. The inventory of available prime, infill logistics space continues to dwindle in many metros, tempering leasing activity. As such, the rising wave of construction completions is a welcome sight for industrial users. Rent growth continues to exceed expectations, with asking rents rising 5.6% YoY, and up 35% from their trough in 2010. Demand for logistics space is concentrated in key national distribution markets: Southern California, Greater New York, Atlanta, Chicago and Dallas/Ft. Worth. Our outlook for the sector is muddied by tariffs already implemented and possibly expanded soon, prompting some short-term disruption in supply chain dynamics.
Store closures and struggling retailers are not painting a pretty picture. But scratch the surface and there is more to the story. Retail spending is on an upward trajectory thanks to a solid job market, rising wages and confident consumers, even as higher gas prices and high rents eat into disposable incomes. The neighborhood and community shopping center segment’s fundamentals further improved in Q3 2018 with availability declining to 9.1%. Developers are still shy of wading into the sector. Lifestyle centers and malls as well as power centers have lower availabilities at around 5.8% and 6.8% respectively but are struggling with negative absorption and rising availabilities in the last two years. However, the retail sector continues to head in the right direction at a slow but steady pace. Retailers and landlords are getting the message about “experience, not stuff.” That consumers are gravitating to and focusing on unique merchandising, food halls, as well as leaning hard on social media influencers.
Although an apartment supply surge is on everyone’s mind, demand for apartments continues to impress. The twin tailwinds of an energized labor market and favorable demographics have been given an additional boost by rising mortgage rates and a for-sale housing market that is low on inventory and high on prices. Overall sector vacancies are being held at bay by construction delays and a bump in demand in 2018. Moreover, with vacancy at 4%, effective rents continue to grow higher rising by over 4% YoY in Q3 2018 and keeping operating fundamentals attractive. The solid rent growth story is quite widespread, even metros with a strong construction pipeline are experiencing rent gains, albeit modest in scale. Risks include a slowdown in the formation of renter househholds as Millennials age and the potential that the anticipated slowdown in construction doesn’t materialize.
The hotel sector’s fundamentals have rebounded in 2018, although the pace slowed down in Q3. The unusual divergence in ADR growth and occupancy that began in late-2015 has finally begun to reverse course – Q3 2018 was the fourth consecutive quarter when the divergence shrank. Occupancy in Q3 2018 declined by 40 bps from a year ago due to higher demand last year after Texas and Florida hurricanes. Gains in ADR YoY were a modest 2.1%, slower than the last three quarters. RevPAR gains were also positive but slower than recent quarters, at 1.7% YoY. Of the top-10 markets for RevPAR growth, six had increases driven primarily by occupancy, ADR being the driver for the other top metros. Oakland produced RevPAR growth with nearly no gain in occupancy, a trend seen in other tech-heavy metros of San Francisco and San Jose where business travel is booming.
This information is for our clients and investors only. 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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