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.
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COMMERCIAL INVESTMENT REAL ESTATE 26 July | August 2017 Sources: 2005–2016 (Q4), CBRE; 2017–2019 (Q4), ULI consensus forecast. Note: The previous ULI consensus forecast (released in October 2016) projected 5.0% and 5.3%, respectively, for 2017 and 2018. 2007 2006 2005 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 5.0% 5.2% 5.7% 5.5% 4.9% 5.1% 5.1% 4.7% 4.6% 5.2% 5.3% 5.4% 6.5% 7.1% 5.8% Actual Forecast 20-Year Avg. (5.4%) e-commerce. It was the No. 1 performing asset class on total return basis on a one- and fi ve-year basis, Levy notes. The risk for industrial is excess supply. "We don't see that happening just yet, because it is hard to fi nd sites to develop in many of these locations, which are partic- ularly strong," Levy says. "The industrial cycle may last longer than perhaps it will for offi ce and multifamily." Along with positive growth from manufacturing, e-commerce will help to keep demand for space strong and occupancies well above the historical average. The sector, however, may see slower growth ahead. The ULI Forecast predicts a 20-basis-point decline in vacancy levels to 8 percent by year-end, no change in 2018, and a slight move higher to 8.4 percent in 2019. Sizzling rent growth also will cool from the high of 6.6 percent recorded last year to 4.6 percent this year, 3.8 percent in 2018, and 3 percent in 2019. Battling New Supply Multifamily jumped out to an early lead in the recov- ery, and many experts have viewed this sector as racing toward the peak for some time. Despite that already long run, some structural changes are at play that could help to prolong the current cycle, accord- ing to Severino. Changing demographics and more people who are choosing to rent versus own have provided a tailwind. In addition, the median age for the fi rst-time home- buyer in the U.S. is 31. Most of the millennials are 24 to 26, which puts them a good fi ve years away from buy- ing a home and moving out of rental housing, he adds. "The biggest challenge apartments face in most markets is excess supply," says Kenneth Riggs Jr., CCIM, CRE, MAI, president of Situs RERC in Chicago, a real estate valuation advisory fi rm. New construction is putting more downward pres- sure on rents, especially in Class A properties. Accord- ing to Reis, construction in the top 82 markets studied surpassed 200,000 units in both 2015 and 2016. "However, while performance will be a lot lower than it has been, it will still be a favored asset class because of the income characteristics and the diver- sity of income streams," Riggs says. While the pri- mary markets may have reached their peaks, there is still room for expansion in secondary markets, such as Austin, Texas; Nashville, Tenn.; and Charlotte, N.C., he adds. Vacancy rates likely bottomed out at 4.6 percent in 2015 and are now inching higher due to the heavy load of new supply. Vacancies are expected to tick higher to reach 5.2 percent by year-end, and increase slightly to 5.3 percent in 2018, and 5.4 percent in 2019, according to the ULI Forecast. Multifamily rental rate growth slowed signifi cantly in 2016, growing just 0.2 percent after six straight years of growth over 3 percent. Rental rate growth is expected to increase to 2 percent this year and stay fl at at 2 percent in both 2018 and 2019. Tepid Demand for Offi ce Belt-tightening in the wake of the recession and a rise in alternative workplace strategies have taken a toll on the demand for more offi ce space. Net absorp- tion was 4.9 million square feet in the fi rst quarter, down from an average net absorption of 9.4 msf per quarter in 2016, according to Reis. Offi ce is a property sector where a big gap in per- formance exists between the top and bottom markets. Downtown offi ce space is doing well, while suburban offi ce is still sputtering along in the recovery phase in most U.S. cities, according to Jones. Some metros have been " just crushing it," Severino agrees. Standouts include tech-oriented markets such as San Francisco and San Jose, Calif. "Technology has clearly been the star performer when it comes to offi ce employment growth during the last fi ve, six, or seven years," Severino says. According to JLL, tech fi rms accounted for a siz- able share of the overall leasing volume in Q1 at 24.2 percent followed by the fi nancial sector at 14.2 per- cent. While the offi ce sector has had its challenges during this cycle, rent growth has accelerated in 2015, 2016, and 2017, according to Severino. Offi ce vacancies are expected to improve about 30 basis points this year to 12.6 percent and then remain relatively fl at during 2018 and 2019, according to the ULI Forecast. Annual rent growth will remain mod- est at between 2 and 2.5 percent. Apartment Vacancy Rates