CRE Demand Maintains Its Steady Path

Posted on March 6, 2019

A voracious appetite for commercial real estate demonstrates no signs of lessening as demand exceeded supply growth for retail, apartments and office markets, and was matched in industrial space.

According to market commentary from NAREIT, vacancy rates declined in office and retail markets, slightly changed in industrial, and had a small seasonal uptick within the multifamily sector. Rent growth decelerated, however, for office, retail and industrial properties while apartment rents continue to accelerate.

Industrial property markets had supply and demand roughly balanced, at high levels, as steady increases in e-commerce sales drive the demand for logistics facilities to ship goods purchased online.

“There is a lot of industrial growth especially with logistics facilities. Supply and demand are evenly balanced even though there is a slight easing of rents from approximately 6% to 5%,” says Calvin Schnure, senior vice president, Research & Economic Analysis for NAREIT.

Apartments enjoyed the highest net absorption on record in 2018, according to data from CoStar.

“There is a much stronger growth and demand for apartments from all age groups,” says Schnure. “Apartment rents are high simply due to demand.”

REITs tend to own higher-quality apartments and they boast high occupancy rates because people are renting and not buying homes. It’s a different path when residents choose to rent instead of purchasing and reasons some individuals choose to rent range from not wanting to settle down to not having a downpayment towards a home purchase. Apartment REITs are answering that call, Schnure tells

With the slower construction of new retail properties, according to the report, demand growth outpaced new construction by a wide margin. Retail stores are struggling to keep up with competition from online stores and so there has been a shift in the type of tenants in the malls including more boutiques and sporting goods stores. Malls typically have a fairly high occupancy rate, however, because “people are still strolling in the malls, trying on clothes and shoes while enjoying the experience. Mall operators also entice customers with experiential events making it a destination. All in all, retail REITs are dealing with retail challenges but they are still doing fairly well,” says Schnure.

Office markets saw a slight slowing in net absorption, to 18.3 million square feet, from 20.5 million square feet in Q3, according to the report. However demand growth in the second half of the year accelerated from the quarterly average of 14.3 million square feet in the first half of the year, and demand exceeded supply growth in Q4 by 2-to-1. Some of the main reasons for the surge is the economy’s steady job growth numbers and the office-sharing phenomenon.

Tana Sterling, GlobeSt.