Archives for March 2018

Reis: National Apartment Vacancy Rate Rises to 4.7% in Q1 2018

March 29, 2018 by CARNM

Average asking rents rose 0.9% over the first quarter of 2018, and average effective rents rose 0.8% according to preliminary apartment data.

The national apartment vacancy rate rose to 4.7% in the first quarter of 2018, up from 4.6% at the end of 2017 and 4.3% in the first quarter of 2017, according to Reis’s preliminary apartment data for the first quarter of 2018. The vacancy rate has risen by 60 basis points from its most recent low of 4.1% in Q3 2016.
The national average asking rent rose by 0.9% to $1,382 per unit over the first quarter of 2018, while the national average effective rent rose by 0.8% to $1,318 per unit. The average asking rent has risen 4.4% since Q1 2017, and the average effective rent has risen 3.9% over the past twelve months.
Net absorption was 27,875 units last quarter, and new construction totaled 39,917 units. Both totals fall below the 2017 quarterly averages of 44,707 units absorbed and 58,824 units constructed.
More than half of the 79 primary markets covered by Reis posted a slight increase in vacancy rates coupled with positive rent growth, including Nashville, Tenn., Austin, Texas, Portland, Ore., and Long Island, N.Y. Metros with the sharpest vacancy declines include Tulsa, Okla., Houston, Memphis, Tenn., Palm Beach, Fla., and Buffalo, N.Y.
Only one metro, Chattanooga, Tenn., posted an effective rent decline. Metros with the lowest rent growth included Milwaukee, Columbia, S.C., and Birmingham, Ala. Twenty-five metros experienced a 1.0% or higher increase in effective rent. Phoenix, Charleston, S.C., and Sacramento, Calif., experienced 1.5% effective rent growth in the first quarter, while Houston, Lexington, Ky., Atlanta, Dallas and Denver experienced effective rent growth between 1.3% and 1.5%. New York is among the bottom ten metros for quarterly effective rent growth, with an increase of 0.3% in the past quarter.
Reis senior economist Barbara Byrne Denham notes that while the apartment market has slowed since the end of 2017 and remained flat over the course of the winter, activity should shift over the course of the next two quarters as the housing market stalls. Denham attributes the shift in the housing market to the Tax Reform and Jobs Act, which has doubled the standard deduction, cut property tax deductibles, and reduced home ownership incentives.
The U.S. added an average of 276,000 jobs in the first two months of the year, up from an average of 221,000 jobs in the previous three months. San Bernardino-Riverside, Calif., Austin, Texas, Orlando, Fla., Seattle and San Jose, Calif., have all experienced job growth above 2.9% from January-February 2017 to January-February 2018, while New Haven, Conn., Fairfield County, Conn., Columbia, S.C., Wichita, Kan., New Orleans and Syracuse, N.Y., have experienced job loss in this period.
Many metros are expected to see growing completion levels in 2018, Denham says, such as Dallas, New York, Los Angeles, Denver and Atlanta. However, vacancy increases are not expected to exceed 2.5% in any market, as job growth is expected to fuel a demand for apartments.
By: Mary Salmonsen (MFE)
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Will Accelerated Self-Storage Development Bypass Space Demand?

March 26, 2018 by CARNM

Demand remains strong in the sector, but “aggressive development” is a dynamic that bears watching, says Marcus & Millichap.

Set against the backdrop of a still-robust economy, the self-storage sector remains strong. But, as Marcus & Millichap reveals in its 2018 Self-Storage Investment Forecast, there are trends that bear watching. Prime among these is the dynamic between development and absorption.
“It’s important to note the underlying economic momentum supporting self-storage demand,” says John Chang, national director of Research Services. “Steady job creation and elevated confidence levels are both key factors sustaining space demand.”
The tight labor market could be a double-edged sword, he notes, and the new tax law could increase pressure on the market as it spurs hiring, business investment and GDP growth. If there are any potential clouds on the horizon, “If there are any potential clouds on the horizon, “businesses are facing a labor shortage that could weigh on overall business expansion,” he says. “These tight labor conditions could place upward pressure on wages, potentially boosting inflation.”
That said, the self-storage market reflects the current strong state of the economy, reports Joel Deis, VP and national director of the National Self-Storage Group: “The retirement and downsizing of baby boomers coupled with the continued emergence of millennials will support the need for self-storage space in the coming years. This demand will only strengthen as these generational forces unfold, providing a positive long-term tailwind for the market.”
The active multifamily market further buoys the self-storage industry, Deis notes, since “apartments often do not offer enough space to house all of a resident’s belongings. Additionally, renters move more frequently, and temporary storage during a move remains a primary reason for renting storage space.”

However, while demand is strong, “aggressive development activity over the past two years is starting to overtake absorption in several markets,” he continues. “Moving forward, the average vacancy and rent growth may soften amid greater competition, particularly in construction-heavy metros.”
On the investment side, a conservative approach is becoming evident, he notes, at least on the part of buyers. “The market is entering a period of transition as rising interest rates, elevated development and more historically normal property performance have tempered buyer assertiveness,” says Deis. “Sellers, on the other hand, continue to expect peak pricing and are baking strong revenue growth forecasts into current values. As a result, a gap between buyer and seller pricing expectations remains open, weighing on transaction volume and elongating closing times.”
REITs as well are responding to what Deis calls “growing industry headwinds,” and they’re growing conservative in acquisitions. “While high-end properties in quality locations will still be actively pursued,” he notes, “REITs may shift their focus to expanding their third-party management business.” He explains that this strategy has proven an effective one, allowing REITs to “control more assets while avoiding direct upfront purchases.”
(For the full report, please click here.)
By: John Salustri (GlobeSt)
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Office Investors Now Look To Suburbs

March 26, 2018 by CARNM

A few years ago, CBD office was all the rage, but higher cap suburban properties are now finding favor.

The US office investment market did cool a bit in 2017, but that was only after a few years of record-setting investment in several metro areas. And a solid fourth quarter slowed down the rate of decline. Furthermore, US real estate remains near the top of many investors’ wish lists, and with 2018 shaping up to be a robust year for the office market, the next year should see a good number of trades. But in a search for higher yields, many investors have started looking past the top CBDs and set their sights on suburban properties.
US office sales volume in the fourth quarter was $36.2 billion, according to a recent report from Colliers International, up from $28.7 billion in the third quarter. However, a slight uptick in volume in the fourth quarter is not unusual as buyers and sellers seek to close transactions before the year end. And total US office sales volume for 2017 was $131.9 billion, down by 8% over the year.
Colliers partly attributes the slight slowdown to a sharp decline in cross-border sales, particularly from China. Foreign investors typically stick with the safest investments, usually the best properties in the nation’s core CBDs. Perhaps it’s not surprising that in 2017 attention shifted away from the six major metros (Boston, Chicago, Los Angeles, Manhattan, San Francisco and Washington, DC) whose combined sales volume of $68.7 billion in 2017 was 15% below the 2016 total. Investment activity in secondary markets showed no change at $53.8 billion.

But in search of higher yields, investors did increasingly look beyond the downtowns. Investors spent $83.1 billion on suburban properties in 2017, a a modest increase of 2% over the year, Colliers finds. Conversely, CBD sales volume fell by 21% in 2017 to $48.8 billion.
And suburbs all over the nation have benefitted from the shift. Detroit’s CBD, for example, has attracted a great deal of attention due to its rise as a tech hub, but last year Hayman Co. made one of the metro’s most significant acquisitions when it bought the 732,000-square-foot Troy Officentre in suburban Troy for $55 million. The new owners plan a $10 million renovation.
The suburbs are also now seen as a fruitful place to put creative office spaces, a style usually thought of as quintessentially urban. Chicago-based Farpoint Development recently purchased the 6300 North River Road building in suburban Rosemont, IL, and plans to transform the 1969 property into something unique. By mid-2018, the company will have ditched the 137,000-square-foot structure’s old-fashioned drop ceilings, replaced the exterior windows, stained the exterior brick, and added many new amenities including a yoga space complete with a Zen garden, the first of its kind in the suburbs.
Average cap rates held firm at 6.7% in the fourth quarter, according to Colliers, and remain tightest in the northeast and west regions at 5.7% and 6.1% respectively. Cap rates stand at 5.6% in downtown markets and 7% in the suburbs, both of which are below their long-term averages of 6.8% and 7.7% respectively.
And despite the downturn in sales volume, pricing remains aggressive in the top CBD markets with Boston, Manhattan and Seattle all having sub-5% cap rates. Manhattan saw the top three of the five largest single-asset trades by dollar value in the fourth quarter, led by Allianz RE of America’s $1.95 billion purchase of One Astor Plaza, 1515 Broadway for SL Green. A joint venture between Transwestern Investment Group and JDM Partners made perhaps the most significant suburban acquisition by buying the 2.1-million-square-foot State Farm campus in Tempe, AZ for $928 million.
By: Brian Rogal (GlobeSt)
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Five Workplace Trends The Commercial Real Estate Industry Must Prepare For

March 26, 2018 by CARNM

The most significant innovations of the last century have a couple of common elements: They solved simple problems in the lives of everyday people, and almost nobody recognized that these problems needed to be solved.

Legend has it that Henry Ford said, “If I had asked people what they wanted, they would have said faster horses.” Modern transportation, internet you can take with you, the ability to easily connect with someone on the other side of the planet — no one really wanted these things before they were invented. But soon after these innovations became widely available, people could not imagine life without them. Chances are, you never knew you needed a smartphone. But now, imagine giving it up for a day and being without directions in your pocket or the answer to any question at your fingertips. There’s simply no going back.
But despite such large shifts, one daily environment has remained stubbornly unchanged for decades: the office.
Despite a tight labor market putting pressure on employers to attract talent, the vast majority of the corporate workforce still works in dull, cubicle-laden office buildings, designed solely for space efficiency and with no regard for human-centered design. Yet we know environments can have a profound impact on our mental health and work output, and we know that experience matters more and more for the next generation of leaders. The office of today is not very conducive to the innovative thinking needed to create the products of tomorrow.

As the co-founder of a workplace hospitality platform, I’ve consistently heard from the 250,000 people who walk through our doors each year that they want their own offices to look and feel more like the ones shared and alternative workspaces provide on a short-term basis, replete with more flexibility, choice and experience in their office environment.
That means that we need to forget “office” and start thinking in terms of “workplace” — a mindset shift that will help commercial real estate professionals understand the trends that will challenge our industry’s most fundamental assumptions in the coming years.

• Form factor shift: Our economy has shifted from manufacturing to innovation-based, but the dominant design of most office buildings is still modeled on yesterday’s assembly line, where workflow was linear, corporate structures were hierarchical and productivity and efficiency were prized above all else. But the nature of work has changed. The primary role of the workplace used to be to create physical proximity between people because that was the only way work got done. Technology has now mitigated the need for proximity, and the new purpose of the workplace is to attract, retain and inspire the best and brightest talent. The modern office will start to look and feel more like a college campus, where employees choose their work environment according to the work that needs to be done.
• The empathetic building: You’ve heard this before: In the future, every building will be a smart building. But so what? The real benefit of a smart building is that technology can help it evolve into an empathetic building — one that not only makes life a little easier for all, but that anticipates and responds to the needs of tenants as individuals. Your building should recognize you as soon as you walk through the door, know what floor you work on and what you like to eat for breakfast. Ride-sharing apps know who and where you are as soon as you open the app. I believe your office building should too.
By: Christopher Kelly (Forbes)
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