INDUSTRIAL OVERVIEW: DEMAND, NEW STARTS FLAG AS RECESSION TAKES HOLD
Second-quarter net absorption totaled 27.2 million SF, bringing the year-to-date total to negative 47.6 million SF for the weakest demand since 2010, as the coronavirus pandemic added to stress on the industrial property sector from slowing global growth and continuing trade disputes. The volume of space under construction fell to 305.5 million SF, down 5.7% from the end of Q1, and Q2 deliveries totaled 5.3 million SF, a 10.7% decline from the first three months of 2020. Nevertheless, deliveries are projected to hit a cyclic peak in 2020 with more than 60% of new product being developed on spec.
The COVID-19 recession is exacerbating struggles faced by manufacturers that now must contend with challenges in accessing materials and supplies, reduced customer orders, and labor shortages. But the lockdowns have increased demand for distribution and last-mile industrial facilities as consumers increasingly turn to online shopping for necessities.
E-commerce giant Amazon, which leased 136 million SF in 2018 and 24 million SF last year, has signed 12 million SF of leases in the first half of 2020. It completed major transactions in Atlanta, San Diego, Tulsa, and Oklahoma City and deals for smaller spaces in Boston, Indianapolis, Tampa, Houston, and Northern New Jersey. Brick-and-mortar merchants including Target, Walmart, Macy’s and others have responded by increasing distribution agreements with third-party logistics firms. The largest Q2 lease was by Harbor Freight for 1.6 million SF in Elmwood, Ill. READ MORE >
OFFICE OVERVIEW: TENANTS SHED THE MOST SPACE SINCE 2009
Office absorption in the second quarter posted the largest negative total since mid-2009 and leasing activity has fallen 40% since late March. Rent growth has seen significant deceleration with the strongest performing markets remaining in the sunbelt, along with some biotech hubs. Second-quarter net absorption fell 21.3 million SF into the red, while companies shed about 4 million office jobs since late March. The national vacancy rate topped 10% for the first time since late 2017, but it remained 80 basis points below the historical average. The vacancy rate is down from a 13.2% peak reached in Q3 2010.
After 14.2 million SF of new product was delivered in the first quarter, there was 9.5 million SF added to the inventory in Q2 as the lockdown stymied projects that were under construction. There are about 270 properties underway larger than 100,000 SF and totaling nearly 97 million SF that are slated for 2021 deliveries or later.
Heading into the recession, the office market was enjoying strong fundamentals in terms of demand, vacancy, leasing activity, and restrained levels of supply, mitigating some of the pain. The year-over-year increase in sublease space totals some 20 million SF, a small amount in an 8 billion SF market. Weekly sublease additions remain consistent with trends over the last two years, as most companies are reluctant to make major real estate decisions. READ MORE >
RETAIL OVERVIEW: MERCHANTS SHED 23.7 MILLION SF IN FIRST HALF
Merchants shed 15.1 million SF of space in the second quarter – bringing the negative net absorption total for the first half to 23.7 million SF – and leasing activity fell by half as retail was pummeled by COVID-19 downturn more than any other commercial property sector. Forced and voluntary store closures are taking a severe toll on many tenants that are struggling amid a near-total loss of foot traffic, falling consumer sentiment and reduced and lost wages. Retailer distress and investor uncertainty curtailed trading activity throughout the second quarter with deal volume totaling about $10 billion, the lowest reading since 2013.
The national vacancy rate ticked up 10 basis points in the second quarter and rent growth fell from 2.4% in the first quarter to 1.5% in Q2. More than 60% of landlords have reduced asking rents. Malls and power centers continue to bear the brunt of rent growth reductions from e-commerce exposure. Neighborhood, strip, and general retail centers have benefited from more resilient forms of demand, which helps support rent growth. READ MORE >
MULTIFAMILY OVERVIEW: VACANCIES, DELINQUENCIES UP AS RENTS FALL
The COVID recession is beginning to punish the multifamily sector. The Q2 vacancy rate has reached 6.8%, its highest level since 2011. Additionally, with weakened demand and rising delinquencies, the 17.2-million-unit sector is in a period of heavy additions of new supply, creating the prospect that vacancy will rise to more than 8%.
The National Multifamily Housing Council’s tracking of rent payments shows 87.6% of tenants made full or partial monthly rent payments by July 13, a 2.5% decrease from the same period last year. It was a decline from the 89% rate of full or part payments the month before. Year-over-year rent growth nationally has fallen to 0.3% after gaining 2.6% last year and rents have fallen about 1% since March. The coronavirus pandemic also has led to a sharp slowdown in sales transaction, and for-sale listings have fallen to roughly half of normal.
With Florida’s tourism industry hit hard by the recession, which has cost some 400,000 layoffs statewide, the Miami and Orlando markets have posted some of the largest rent declines since their pre-pandemic peaks. Florida’s unemployment benefits are among the weakest in the United States, adding to downward pressure on demand and limiting the tenants’ ability to pay rent. READ MORE >