Commercial Investment Real Estate

JAN-FEB 2018

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 28 January | February 2018 Sources: 1997–2016 (Q4), CBRE; 2017–2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected 12.6%, 12.5%, and 12.6%, respectively, for 2017, 2018, and 2019. Sources: 1997–2016 (Q4), CBRE; 2017–2019, ULI Consensus Forecast. Note: The previous ULI Consensus Forecast (released in April 2017) projected 10.1%, 10.0%, and 10.1%, respectively, for 2017, 2018, and 2019. Office Vacancy Rates 13.6% 16.5% 14.1% 16.4% 16.0% 15.4% 14.9% 13.9% 13.1% 12.9% 13.0% 13.1% 13.4% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Actual Forecast 20-Year Avg. (13.5%) 12.5% 12.5% Retail Availability Rates 7.4% 8.1% 10.8% 12.6% 12.9% 13.0% 12.6% 11.9% 11.3% 11.1% 10.1% 10.1% 10.2% 10.3% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Actual Forecast 20-Year Avg. (9.8%) 9.0% Within multifamily, some submar- kets nationwide have loads of new supply, and other submarkets have very limited new supply. Atlanta's Midtown market, for example, has 26 percent of its total Class A inventory currently under construction. "There are big differences between cities, submarkets, and class types," Nordby says. In addition, emphasis has been more concentrated in high-end, Class A projects. Bumpy Ride On the retail front, store closures and retailer bankruptcies are battering brick-and-mortar retail. According to a retail report from Cushman & Wakefield, an estimated 10,000 stores were expected to close in 2017, which was more than double the nearly 4,000 stores that were shuttered in 2016. Malls are taking the brunt of the retailer shake-out, and more closings are certain for 2018. The vacancy rate for malls increased 20 basis points to 8.3 percent in third quar- ter 2017, according to Reis. Most of J.C. Penney's and Macy's announced store closings have occurred already, while Sears recently announced 63 more stores to close in late January. However, those closures are not having a big impact on nationwide vacancy numbers. The closure of a huge anchor store reduces foot traffic and creates more dark space in a mall, Denham notes. The whole reorganization of the mall industry will continue to be a big issue in 2018, she adds. The 2017 holiday shopping season will likely result in more fallout. "Retailers are not going to throw in the towel until after the holiday sales are done," Nordby says. That news is going to hit in January 2018, and that will likely create more excess space. "In January, we're going to be talking about more store closures, and there is going to be a lot," he says. Retail is clearly a sector in transition. However, the retail climate is not as bleak as some of the news stories suggest. "The good news is that developers are not building retail like they had been prior to the Great Recession, and we're still seeing a decent amount of net absorption in some mar- kets," Denham says. Although some soft spots exist in specific markets and sub- markets, the overall outlook for the economy and commercial real estate remains positive for 2018 and likely into 2019. "The pattern of 2-percent growth has been so consistent throughout this expansion, and it has created anxiety in some people who think we should be growing at a faster rate," Denham says. "It is my view that this slow, steady expansion should continue at the same pace, just for the reasons that it has stayed at this pace — that it is a healthy, sustainable rate of growth." Beth Mattson-Teig is a business writer based in Minneapolis. "More than half of markets have excess supply that is affecting vacancy rates and slowing down rent growth," says Barbara Denham, senior economist at Reis in the New York City metro area. Those apartment markets that are hurting include smaller cities, such as Oklahoma City; Little Rock, Ark.; and Tulsa, Okla., as well as major metros. New York City has struggled more recently due to overbuilding and flat rent growth, while San Francisco and Boston also are flat. "Markets that have been overbuilding have suffered a bit because of retrenchment and some slight declines," Den- ham says. Overall, relatively healthy occupancy exists in apartment markets, she adds. The ULI Forecast predicts that vacancies will climb from 4.8 percent in 2017 to 5.1 percent by the end of 2019. However, those levels are still below the 20-year average of 5.4 percent.

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