Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/143044
Economy Drivers Are Consistent Real GDP grew at a healthy rate of 2.5 percent in 1Q13, fueled primarily by stronger consumer spending and inventory accumulation. A sustainable recovery must always be led by confdent consumers who are willing to spend and a business community that plans to make and sell a lot more merchandise. Te labor markets have also demonstrated solid progress, as the U.S. economy created an average of 179,000 net new jobs per month for the 31 straight months ending in April. From January to April, job growth accelerated faster, averaging 195,000 net new jobs per month. Also encouraging is the fact that the recovery is spreading beyond the major metropolitan areas. While major markets such as New York, Houston, and San Francisco are still registering solid employment gains, smaller metro areas including Boulder, Colo., Nashville, Tenn., and Louisville, Ky., are registering higher percentages for job growth. Out of the 378 major metro markets tracked, 302 are logging year-over-year employment gains. Housing Is Huge With mortgage rates remaining at record lows, homes in afordable price ranges, and job growth sparking a new wave of demand, the housing sector is powering growth once again. Sales of existing singlefamily homes are running at an annualized rate of around 5 million units, the highest pace in six years. U.S. home prices are appreciating at a lofy 12 percent rate year to date, and in certain markets, such as Phoenix, Las Vegas, and several California metros, 20 percent to 30 percent price appreciation is more common. Housing inventories have dwindled to low levels similar to the last real estate boom. Developers are well aware of the tightening supply, and housing starts jumped to 1.04 million units in March — a 46 percent YOY increase. Te multiplier efect associated with a housing recovery is huge. Housing typically contributes as much as one full percentage point to GDP growth during recovery periods. Around 30 basis points of housing's contribution to economic output come from new residential construction; the rest is derived from other housing-related activities such as increased construction employment, mortgage lending, brokerage, and legal services. Te wealth efect is also in play. Every $1 increase in home value typically boosts consumption by 10 cents. Given the way home prices are trending this year, housing could contribute as much as $100 billion to $150 billion in increased personal consumption. It is also worth noting that housing is a major demand driver for the warehouse sector. Te greater need to store concrete, lumber, glass, dishwashers, laundry machines, refrigerators, and similar items CCIM.com could boost warehouse space demand by as much as 15 percent this year. Property market cycles and housing cycles historically have moved in tandem. As a result, if the housing market is at the cusp of rebounding, the commercial real estate market is soon to follow. Fundamentals Unevenly Improving With job growth spreading, commercial real estate fundamentals are also improving. However, the improvement is very uneven across diferent commercial real estate property sectors. A number of factors are contributing to the uneven but steadily improving market. Multifamily. Te apartment segment continues to experience robust demand virtually across the board. U.S. apartment vacancy ended 1Q13 at 4.3 percent — the lowest national vacancy rate in more than a decade. In addition, all of the 82 markets tracked by Reis posted YOY increases in asking and efective rents. In fact, supply is shockingly scarce in some markets. For example in New York City, the vacancy rate is a mere 1.9 percent. Likewise, San Diego, San Jose, Calif., and Minneapolis have vacancy rates of 2.5 percent or lower. However, the days of razor-thin inventory are numbered. Developers have 423,000 new apartment units scheduled for delivery between now and 2015. Tis represents the largest wave of new supply in more than two decades. On top of this supply trend, the housing recovery is already beginning to steal a portion of demand away from the rental market. In 1Q13, demand for apartment units remained healthy but dropped a noticeable 16 percent from the previous quarter. In general, the apartment sector remains a solid bet for investors, but it would be wise to ease up on pro forma assumptions in 2014 and beyond. Industrial. Aggregate demand fgures for the industrial sector have also been impressive. In fact, the U.S. has absorbed 238 million square feet since 2010 — one of the strongest stretches on record since 1990. With increased consumer spending for vehicles, houses, technology, logistics, housing-related goods, and food-based commodities, there is no sign that demand for industrial space will diminish any time soon. In 1Q13 alone, the industrial sector absorbed 32 million sf, which is the strongest reading in the current recovery. In particular, newly built industrial big-box space that caters to e-commerce has been the shining star. Vacancy for that segment is under 3 percent for certain markets, which is a solid 700 basis points tighter than vacancy for older warehouse product. Ofce. Te ofce sector is clearly lagging behind multifamily and industrial. Te ofce recovery continues to be hampered by a shif in space utilization along with tenant downsizing. Te amount of ofce space per worker has declined from 225 sf prior to the recession to 180 July | August | 2013 31