Lee & Associates Breaks Down Third-Quarter Economic Outlook by Sector
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 >