Below are a few key takeaways from FactRight’s Q1 2018 U.S. market analyses and commercial real estate research; if you want to learn more, you can download the full-length sector insight reports (retail, industrial, multifamily, healthcare, hospitality, and office) from FactRight’s Report Center.
Change is the name of the retail game
The development of robust omni-channel platforms and the concept of creating in-store “experiences” will be crucial propellants for brick-and-mortar retailers going forward, especially large department stores. For example, Macy’s sales were up more than 4.0% in the first quarter of 2018, reversing the predominantly downward financial trends reported by the retailer over the past three years; the company’s small but meaningful recent successes can be at least partially attributed to its increased focus on technology (ex: in-store mobile checkout) and new-found attention to the customer experience (ex: the rollout of augmented-reality furniture shopping, the expansion of various ‘off-price’ Macy’s concepts). Ultimately, as consumers’ tastes have shifted more towards experiences, strong value propositions, and the convenience of e-commerce, many retailers will be forced to revamp their business strategies to include a broader online presence and/or close brick-and-mortar locations to remain competitive.
Full speed ahead
The industrial sector outperformed every other facet of the commercial real estate industry in 2017, and shows no signs of slowing in 2018. Industrial vacancies hit a historic low of 5.0% during the first quarter of 2018, pushing 30 basis points stronger on a year-over-year basis and remaining a whopping 340 basis points below the 10-year historical average (8.4%). A strong labor market, healthy consumer confidence, and an improving manufacturing sector all bode well for the strength of the industrial sector, as they promote real consumption and thus serve as a catalyst for industrial-related leasing. Overall, the U.S. economy continues to exhibit signs of strength and we can expect the continuation of positive economic trends to propel the industrial sector throughout 2018.
New supply continues to outpace demand
While multifamily fundamentals appear to be holding steady thus far in 2018, it is important to note that nearly half of the 260,000 apartment units completed over the past year were located in just 10 U.S. metros; correspondingly, roughly 75% of apartment units completed over the past year were located in just 20 U.S. metros (CBRE). Among the 20 top construction markets, Charlotte had the highest completions-to-inventory ratio (4.9%), followed by Nashville (4.7%), San Antonio (4.6%), and Austin (4.0%). While amplified demand in these markets may indeed justify corresponding surges in supply, CBRE cites that the aforementioned markets are currently considered to be the most at risk for over building. With that being said, the fundamental drivers supporting the apartment market remain intact and the overall outlook for the sector remains positive.
Convenience and flexibility remain key
Between 2016 and 2025, the number of people aged 65+ in the United States is projected to increase by nearly 32%; while this demographic segment is expected to expand more precipitously in southern regions—with markets like Orlando growing at clip more than double the national rate (+67%)—the demand for a broad spectrum of healthcare-related products, services, and real estate is expected to markedly increase on a national basis going forward. Moreover, as patients increasingly value affordability, convenience, and flexibility, the demand for walk-in-centers, urgent care centers, and various other outpatient medical facilities will continue to rise. Oppositely, the demand for large hospitals and healthcare systems, which are historically more inflexible and expensive, will continue to decline.
Demand gains slow as supply continues to grow
Eight of the top-10 supply growth markets had demand growth that failed to keep pace with new supply, and thus experienced declining occupancies during the quarter (Austin, Charleston, Dallas, Nashville, Seattle, Los Angeles, Charlotte, and Raleigh-Durham).With that being said, the robust labor market trends (which promote business spending and travel) and healthy consumer confidence levels (which promote personal spending and travel) that we saw throughout 2017 are expected to continue to propel the hospitality industry forward in 2018. Longer term, Deloitte cites that the hospitality industry is poised to benefit from a prolonged structural shift towards increased household spending on services and experiences, rather than on goods.
Office occupancies weaken
National office vacancies increased 20 basis points to 13.3% during the first quarter of 2018, and have remained fastened in the low 13%-range for approximately two years. The lowest office vacancy rates continue to be tied to some of the largest technology hubs in the nation, including Midtown South Manhattan (6.5%), San Francisco (7.6%), and Seattle (8.1%). As of the first quarter of 2018, the technology and financial services sectors accounted for an enormous portion of office space demand in the United States—capturing approximately 42% of all leasing activity (Cushman & Wakefield). Throughout 2018, the office sector is expected to continue to be buoyed by the booming technology sector and the general strength of the U.S. economy. Longer term, the demand for office space will continue to be challenged by trends associated with globalization, technology, and changing workplace preferences.