GlobeSt.com Features Lee & Associates Industrial & Multifamily Research

The current economic headwinds have been a cause for alarm in certain sectors. Not so for industrial and multifamily, however. With US industrial vacancy at 4% and multifamily’s pipeline tightening, the data from Lee & Associates’ Q3 2022 Market Report shows both sectors have room for rent growth.

It’s a story about fundamentals that point to continued strength, according to Jeff Rinkov, CEO of the broker-owned real estate services firm.

Industrial Strength Continues Beyond Amazon

“The industrial leasing story continues to be the strongest theme maybe in all of commercial real estate with demand remaining robust,” Rinkov said. “We see pre-leasing of Class-A buildings and a rising tide of rental rate growth for B and C buildings that are well-located. Historic rate increases and rental growth are supporting the development and have been supportive of higher land prices for the last several years.”

Industrial vacancy at end of the third quarter settled at that 4% number, up 10 basis points from Q2, according to the Lee & Associates market report. Approximately 850 million square feet of industrial space are under development in the US with about 38% pre-leased.

“How the other 62% of that product gets leased and how quickly I think will tell the story for the next 18 months,” said Rinkov, adding that there is space coming back to the market, led by Amazon shedding millions of square feet of warehouse capacity, but it is getting absorbed very quickly and at “higher and higher rates.”

Multifamily Moves

Although apartment rent growth of 5.7% through Q3 was down considerably year over year, it’s still more than twice the annual average rate of 2.5% over the past decade, Lee & Associates reported.

“The multifamily sector has seen a very compelling story for rental increases and rent growth,” Rinkov said. “As a general economy, we’re underhoused so housing development that is happening is being well received. We do see an interest in people returning to CBD and metropolitan submarkets.”

Lee & Associates reported a 29% year-over-year increase in the average per-unit sale price to $233,974 at the end of the third quarter.

“Multifamily seems to be the asset class where there’s historically been the greatest amount of liquidity, cap rate compression, and the most voluminous trading because of the differentiation in the types of ownership, from the institutional to regional and all the way down to mom & pop owners,” Rinkov said. “Well-located product is going to continue to be developed and absorbed at very significant rental rates.”

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The calculus for which asset classes are likeliest to demonstrate strong growth continues to shift as the pandemic appears to be receding. Patterns in labor shortages, supply chain issues and material costs have managed to solidify through the third quarter of 2021.

Lee & Associates’ newly released Q3 2021 North America Market Report dissects third-quarter 2021 industrial, office, retail and multifamily findings, with a focus on where demand is moving and the challenges facing each asset class. Lee & Associates has made the full market report available at this link (with further breakdowns of factors like vacancy rates, market rents, inventory square footage and cap rates by city).

Below is a bird’s-eye overview of four commercial real estate asset classes as general categories, broken down to frame each through the trends and complications they faced up to the fourth quarter, according to Lee & Associates’ research. 

Industrial: Q3 Posts More Record Demand

Pandemic-fueled consumer spending drove up third-quarter demand for warehouse and distribution facilities that eclipsed previous records. And despite a nationwide surge in new construction, some metros can barely accommodate the pace of tenant expansion. Additionally, year-over-year rent growth is at a record 6.7 percent for the industrial property sector as a whole and 7.9 percent for logistics facilities.

The national vacancy rate fell at the fastest pace ever in the third quarter, settling at a record low 4.6 percent. Net absorption in the third quarter totaled 157.9 million square feet, a 17.2 percent increase over second quarter’s record-setting net growth of 134.7 million square feet. Net absorption through the first three quarters of 2021 totaled 366.5 million square feet. The previous record was 278.7 million square feet set in 2016. It’s also notable that net absorption already has exceeded the record 342.9 million square feet of new deliveries expected this year. READ MORE >

Office: Positive Demand Returns

The nation’s office market posted positive net absorption in the third quarter. It was the first quarter of growth since the pandemic hit. The tenant expansion came despite spiking COVID Delta infections that began in early July, renewing employer caution over office re-opening plans.

Net absorption totaled 11,792,287 square feet in the third quarter. But over the previous 18 months negative absorption totaled 131 million square feet, which accounts for 1.6 percent of the 8.2-billion-square feet inventory. It also is equal to two years of growth in a strong pre-COVID economy, during which the five-year absorption average was 65.5 million square feet per year. READ MORE >

Retail Demand Stages a Comeback

Retail real estate is staging a notable comeback in 2021, bolstered by enormous government subsidies to consumers, who largely are getting vaccinated. While there was a sharp increase in e-commerce in 2020, this year has been brick-and-mortar’s turn. Merchants expanded their real estate footprints again in the third quarter by 28.6 million square feet. This follows 20.2 million square feet of positive net absorption in the second quarter and 4.5 million square feet in the first, and brings overall year-to-date growth to 53.3 million square feet, 52 percent more than for all of 2019.

In addition to the injection of more than a trillion dollars into consumers’ wallets, reopening of the economy and easing restrictions on operations also helped slow the pace of store closure announcements and bankruptcies, which are on pace to impact the least amount of space since 2016.

Many retailers are expanding into new locations with grocery, discount, home décor and beauty sectors as the most active. At the same time, the average-sized footprint continues to lessen as several merchants, such as Target, Macy’s and Burlington, are focusing on operating leaner, smaller formatted stores. Retailers’ expansion plans continue to focus on faster-growing metros in the South and West, where absorption and leasing activity is greatest. READ MORE >

Multifamily: Growth Pressures Hit Renters

Apartment demand is in overdrive and rents are soaring. Third-quarter absorption totaled 203,994 units, bringing the year-to-date total to 621,680. That’s a 67 percent increase over last year’s absorption record of 372,904 apartments. The vacancy rate for 17.8 million apartments is at an all-time low 4.6 percent.

At the end of the third quarter, monthly rents were up an average 10.4 percent this year to $1,524 per unit or $1.71 per square feet. Rents were highest in San Francisco, averaging $2,964, up 10 percent this year. Of the top 80 U.S. metros, 17 posted annual growth rates over 15 percent. Austin, Jacksonville, Las Vegas, Orlando, Phoenix, Raleigh and Tampa averaged asking rent hikes of more than 20 percent.

Third-quarter net absorption totaled 142,274 units out of 4.8 million Class A apartments and 193,458 apartments out of 7.2 million Class B units. Dallas/Ft. Worth was No. 1 in net absorption with 46,145 units in the last 12 months.

With demand and rent growth indicators surging and values back on the rise, investors have regained confidence in the sector and sales volume has returned to more normal levels in the last few quarters. Investors are increasingly drawn to the Sunbelt markets. Third-quarter sales volume in metros like Dallas/Ft. Worth, Atlanta and Phoenix was well ahead of trading levels early this year. READ MORE >

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Industrial real estate in Southern California has become what one might conservatively call a “fast-paced atmosphere.” The presence of multiple offers, sellers pushing up values and buyers continuing to chase deals have made for constantly increasing values and activity. Christopher J. Destino, SIOR, principal at Lee & Associates, spoke to REBusinessOnline about making strategic decisions in this unusual environment.

REBusiness: What is the forecast for demand in industrial properties in Southern California?

Destino: The future of demand in the area is very strong, with developers seeking new sites aggressively and underwriting steady future rent growth over the next couple of years. A lot of that is driven by e-commerce, and there’s still so much room to grow in the e-commerce world. E-commerce accounted for approximately 13.6 percent of retail sales in the first quarter of 2021 (a number that is steadily increasing). There is still a lot of room for that percent to increase, and that’s what is driving most industrial demand.

REBusiness: What are the types of tenants have the most demand for space right now?

Destino: The big three are distribution companies, contractors and service-type industries.  There is a still a small manufacturing base, but those are the three that are largely getting the deals.

Distribution companies have all sorts of all product types: high dollar value products to regular homewares, and everything in between. Distribution also includes freight forwarding and  third-party logistics companies that store and move around other company’s products. It also includes traditional companies that own, store and deliver their own product directly.

Contractors (plumbers and electricians, for example) tend to be service related and have a fleet of vehicles that need to go out to various job sites. They often occupy industrial spaces. These industries are very busy these days.

REBusiness: What types of buildings are favored amongst industrial spaces?

Destino: When you think of the buildings that would fall under the distribution-type use, they’re going to feature higher ceilings and ample dock loading positions, with quality turning radius for trucks to come and go and distribute product. Those are the number one sought-after deals right now, and they are e-commerce driven. That’s what users want and what developers are building. Other types of industries that are absorbing space (the contractors and service industries) can get away with lower-clear/ground-level loading buildings, but distribution companies are driving the market charge in terms of what is desired for buildings.

REBusiness: How has industrial evolved over the past few years?

Destino: Over the last seven or so years, the market has tried to adjust to deal with the e-commerce revolution. That’s why there is nearly 20 million square feet of industrial space that has being built in the Inland Empire every year for the last several years: most of that is getting absorbed by e-commerce-related outfits, in one way or another. That is the evolution: older manufacturing sites, over the last seven to ten years, have either been converted to distribution space (specifically high-cube distribution space) or (in the past) they were converted to multifamily developments.

There is still a manufacturing element for Southern California/Orange County industrial. But it’s mostly higher-end products with higher markups/higher dollar values. These tends to be more specialty products that have low overall volume. Most high-volume manufacturing is going out of the state or out the country entirely.

We’re also starting to see more cold storage, food-distribution-type facilities. Similar to the trends we’ve seen with general merchandise, there’s now an emphasis on establishing direct-to-consumer food delivery channels. Especially in Southern California, people want healthier, locally sourced or organic food. Food needs to be moved from its point of origin to the consumer’s plate faster than ever before. There’s a push for cold storage, but you’re not seeing a lot of spec development for it. I think that demand will persist.

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