As the Commercial Real Estate Cycle Turns: With domestic demand projected to remain fairly healthy, CRE fundamentals should also continue to advance.
- CRE Operating Fundamentals
- Supply still Growing
- Valuations Still Elevated
- Risk Premium Still Favorable
Outperforming Sectors are still Growing, but Shift is Imminent
- For commercial real estate, sectors that have outperformed in the cycle, like apartments and hotels, continued to post gains in 2015
CRE Property Pricing & Fundamentals
- Operating fundamentals for CRE continued to advance in Q4 2015, with transaction volume surging during the quarter.
- Excluding hotels, cap rates trended lower in Q4.
- Foreign buyers were very active in 2015, with cross-border activity swelling to $90.2 billion.
- The national vacancy rate of apartments increased to 4.4 percent in Q4 as rising supply outpaced demand.
- Effective rent growth remained robust in Q4 with national year-ago gains increasing 4.7 percent.
- Office fundamentals continued to improve at a steady pace in Q4 as labor market conditions improved with demand for office space picking up and the vacancy rate falling to 16.3 percent.
- Class A and B/C office vacancy rates in major markets continued to decline in 2015 and are currently below the national average.
- Office effective revenue growth continues to surge in technology-intensive markets like San Diego, Seattle and Chicago, with the quarterly annualized rate suggesting an accelerating pattern.
- Retail fundamentals continue to lag in the cycle compared to other property types, but the recovery has been mixed.
- Growing e-commerce has also slowed the overall pace of activity as retailers downsize floor plans and reduce the number of stores; however, some online retailers are starting to set up physical locations.
- Retail effective revenue growth continues to improve, with secondary markets, like Miami, Raleigh-Durham and Suburban Virginia, seeing some of the strongest gains over the past year.
- Industrial demand remained robust throughout 2015, continuing to outstrip completions; thus, overall effective revenue growth rose 5.9 percent over the past year.
- Cross-border activity also surged in 2015, with Singapore making the largest investment in the U.S. industrial space.
- Over the next three years, completions as a percent of stock in the Inland Empire and Atlanta are projected to far outpace the national average of almost 5 percent, reaching 15.2 and 10.0 percent, respectively.
- Overall hotel performance metrics remain solid, but are beginning to decelerate from their cycle high.
- The pipeline of new hotel construction continues to increase with almost 500,000 rooms in development.
Houston Market Overview
- Although Houston’s economy is more diverse than in previous cycles, concerns continue to grow around the health of office fundamentals.
- By submarket, Class A office space in North/FM 1960 and Class B/C in the CBD and North Belt saw the largest vacancy rate percentage point increase last year.
- Supply is also increasing with Reis projecting completions as a percent of stock to peak this year; however, office operating fundamentals will likely get worse before they get better.
Read the complete commentary here: cre-chartbook-4q2015-20160216