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.”

RECENT MEDIA COVERAGE

WealthManagement.com Features Lee & Associates New York City's Ben Tapper

Rising interest rates, inflation and fears of a recession are starting to change the calculations of how to get the best returns for commercial real estate investors. Should they continue to favor multifamily and industrial assets, which have served them well through the pandemic disruption? Or switch to higher risk, but higher yield investments? It looks like the best approach might be combining the two strategies.

Ben Tapper, a senior managing director and director of the national investment services group with Lee & Associates, says any outlook needs to be broken down by region. In some parts of the country, rent regulations make multifamily assets less desirable. The area’s job and population growth trends also make a difference, Tapper adds.

There are other asset types that are attractive in a rising interest rate and inflationary environment, according to Tapper, but a lot of that has to do “with your acquisition basis.”

In addition, properties that require greater supporting infrastructure and carry higher replacement costs make for more desirable investments in today’s environment, he notes. One example is the medical office sector, where it’s expensive to build out the necessary infrastructure such as HVAC, X-ray-proof walls and MRI machines.

“Things like that are more cost-intensive to put into a building, creating a greater stickiness in the tenant, greater predictability and greater stability,” Tapper says. “I think in a rising interest rate and inflationary environment that’s what a lot of investors are seeking.”

RECENT MEDIA COVERAGE

When the pandemic engulfed the world last year, few analysts predicted that the multifamily sector would flourish and thrive so well. Most suspected that the sector would be on life support. Yet, despite a year-long national eviction moratorium, there hasn’t been a better time to be a big apartment-building landlord.

Multifamily-property values have increased 13 percent since before the pandemic and more money is being invested now in apartment buildings than in any other type of commercial real estate. How did this happen and what explains this? Lee & Associates’ research will delve into why the multifamily sector, contrary to past predictions and present-day misperceptions, is flourishing as never before.

1. Measured on an annual basis, national asking rents rose 10.3 percent in August.

That marked the first double-digit increase in the more than 20 years the data of 13 million professionally managed apartments has been collected, and in several cities, the rent increases were much more significant than the national figure.[1] August rents rose more than 20 percent year-over-year in Phoenix, Las Vegas and Tampa. Similarly, monthly rents were up more than 20 percent in comparable markets such as Boise, Idaho and Naples, Florida.

2. Multiple factors explain this rise in rents.

Younger adults who lived with family last year are now renting their own apartments, and middle-income workers who have been priced out of the housing market have few options. If they want to live in an apartment, they must pay higher rents. Moreover, demand for new apartments is outstripping the capabilities of developers to supply them.

3. Apartment occupancy rates hit a record high of 97.1 percent in August.

This is a critical metric landlords use to determine how much they can increase rent. As the occupancy increases, so too does the capability of landlords to increase rents. Additionally, household incomes for new renters at professionally managed properties also reached a new high of more than $70,000 a year.[2] This further strengthens the leverage landlords have over renters.

RECENT MEDIA COVERAGE

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 >

RECENT MEDIA COVERAGE

There has been much anecdotal discussion lately of Californians fleeing high-cost, high-density, high-traffic living for greener pastures, especially as COVID-19 made working from home a possibility for California’s high-tech workforce. This trend is not just a rumor for the residents of Idaho. Idaho is the second-fastest growing state in the nation[1], and Californians make up nearly 46 percent[2] of a new population influx that the state has experienced over the past five years.

What is driving so many people from the Golden State to the Gem State, and what does this mean for commercial real estate prospects in Idaho? REBusiness sat down with Matt Mahoney, managing principal, Lee & Associates Idaho, to answer those questions.

Remote Work and Booming Growth

COVID-19-related remote work is driving people to areas where there is a high quality of life, natural beauty and an abundance of outdoor activities. Matt Mahoney notes that because Idaho’s population is lower to start with, the state can easily find itself at the top of lists of fast-growing states. Still, there is real growth in Idaho’s population (increasing 17.4 percent since the 2010 census[3]).

However, Mahoney believes there is a lag between the exploding population and the commercial real estate world, though this delay is changing even now. “Because it is very public data that Idaho is one of the fast-growing states in the union, capital is now following. It has flooded into this area from all parts of the country, and it is chasing a yield. Historically, our yields have been a little higher than those of nearby states along the Pacific Ocean.” READ MORE >

The Business of Idaho

Mahoney notes several attractants: a balanced state budget, moderate taxes and fiscally conservative practices (especially when compared with California) that make Idaho (and Boise in particular) increasingly popular with a variety of companies.

“It’s really good to see manufacturing relocating to this area, because historically we haven’t had lot of manufacturing jobs here — other than technology-based manufacturing. In that technology sense, Idaho has HP’s printer division and Micron (which has their corporate headquarters here). But traditional machine-based manufacturing (including auto manufacturing) historically has not been in this area. We are seeing some of those more blue-collar jobs relocate from other cities. That primarily has to do with our lower cost of utilities and lower wages than in some surrounding states.” READ MORE >

Breakdown by Asset Type

Multifamily has very little vacancy and there’s very little turnover in that area. Low unemployment means that rent rates have been able to steadily rise.

Industrial markets in Idaho are very hot but underbuilt for the interest that they’ve been generating of late. New developers are entering and building industrial properties quickly and with good reason — the asset class has a vacancy level of less than three percent. The only slowdowns for industrial right now, according to Mahoney, are the need to obtain permits and the fact that the cost of construction continues to rise. READ MORE >

Where and How Long to Expect Growth

The Boise metro area (or the Treasure Valley) includes Ada, Boise, Canyon, Gem and Owyhee counties. The Treasure Valley houses the majority of the state’s population influx (especially from states like California, Oregon, Washington, Arizona and Texas), but the metro area is also drawing residents from within Idaho itself (especially Eastern and Northern parts of the state). And Boise area suburbs will continue to benefit from the infusion of people.

In the eastern part of the state, Idaho Falls is Idaho’s second largest city and boasts Idaho Laboratories. In the Northwest, Coeur d’Alene is attracting residents, but not necessarily new companies. READ MORE >

RECENT MEDIA COVERAGE

RECENT MEDIA COVERAGE

RECENT MEDIA COVERAGE