Archives for January 2023

Demand for new apartment leases has “all but evaporated” as consumer confidence remains low and inflation continues to rise, according to the latest data from RealPage.

In other words, say farewell to the days of record-high household formations.

 “We’ve never before seen a period like this – weak demand for all types of housing despite robust job growth and sizable wage gains,” RealPage Chief Economist Jay Parsons said. “It wasn’t just apartment demand that shot up in 2021 and plunged in 2022. The same pattern played out to varying degrees in other rentals and in for-sale homes.” 

Parsons and his colleagues also note that “while some pundits have suggested demand is slowing due to affordability challenges, there’s not yet any evidence that’s true within the professionally managed, market-rate apartment market,” adding that turnover, while normalizing, is still low and nearly 96% of renters were paying on time as of November 2022.

In addition, “there’s no indication renters are doubling up to any significant degree,” RealPage analysts say. “That may occur later, but as the publicly traded apartment REITs all reported in their last earnings call, it’s not a major factor yet.” What’s more, “there’s no “’flight to affordability’ –meaning that renters aren’t moving down from more expensive units or markets into more affordable units or markets,” according to RealPage. “The drop in demand came across all price points and in essentially all markets.”

According to Parsons, the cause is consumer confidence.

“Low consumer confidence means many American households feel nervous and uncertain, and that has a freezing effect on household formation and housing demand,” Parsons said. “Human nature is that when we feel uncertain, we’re much more likely to stay put – and that’s what happened in 2022.”

Rents for new apartments fell in December for the fourth consecutive month, declining by 0.4%. Rent have dropped by a cumulative 1.6% since September, according to RealPage. The deepest rent cuts were in tech-heavy markets like Austin, San Jose and Raleigh/Durham, as well as cities like Las Vegas, Phoenix and Sacramento, which all benefited from strong pandemic-era in-migration trends.

Source: “New Apartment Demand ‘All But Evaporated“

Industrial supply outpaced demand for the second straight quarter in Q4 2022, with overall absorption net absorption down 9.4% quarter over quarter and 15% over 2021′s year to date total, according to new research from Cushman & Wakefield.

Meanwhile, vacancy rose by 20 basis points to 3.3% in Q4 as speculative construction completions continue to chug along despite a lull in leasing activity. Approximately 143.6 million square feet of industrial space was completed in the fourth quarter after hitting a historic high in Q3; overall, completions were up 37% compared to YTD 2021, and almost 73% of those completions were speculative.

Construction starts did show signs of moderating in Q4 as the under-construction pipeline dipped below 700 million square feet. Eighty-three percent of that under-construction space is on a speculative basis while 21.3% has been pre-leased.

The under-construction pipeline fell back below 700 MSF as construction starts began to moderate due to the economic uncertainty. Of the 682.6 MSF currently being built, 83% is on a speculative basis, while just 21.3% of the product has been pre-leased by tenants.

“New leasing activity continues to moderate as tight market conditions coupled with a potential downturn pushed the quarterly total lower by 28.2% since Q3,” said Jason Price, Senior Research Director for Cushman & Wakefield. “However, the 132.1 MSF leased was more in line with pre-COVID-19 historical totals.”

A total of 756.8 million square feet as leased in Q4 year-to-date, the second highest amount ever behind 2021′s banner year. Quarterly rent growth also tempered, increasing 0.9% in the quarter after pushing up 4% in Q3.

The amount of available sublease space in the sector continues to rise and has increased by nearly 46% since the beginning of last year, according to Colliers data. Much of the available space is listed in facilities still under construction, according to the firm’s Amanda Ortiz, suggesting pre-leased space is already being given back to the market.

“With the full pipeline of projects yet to be delivered, overall vacancy will likely increase as new space and additional sublet space is added to the market in the coming year,” Ortiz says. “However, it’s important to remember that although industrial demand is decelerating, occupancy gains remain well-above pre-pandemic levels. While it may seem like a sharp drop in demand, large occupiers including major retailers, 3PL companies, and food and beverage companies will continue to expand in 2023.”

Source: “Industrial Supply Outpaced Demand Again In Q4“

According to CBRE, when it comes to office the king of the metrics for the second year running is utilization: cost per seat, design density and vacancy tied for second place.

This comes from CBRE’s analysis, 2022-2023 CBRE Global Workplace & Occupancy Insights, an annual survey of major occupiers worldwide.

“This year, 60 organizations participated in the program, representing 493 million sq. ft. (46 million sq. m.) across eight sectors,” the firm wrote. “Their anonymized responses were aggregated into benchmarking dashboards that offer 50,000 unique workplace, occupancy and space management data points to deliver industry-leading global, regional and market-level perspectives by sector and asset type.”

The number of organizations is a small sample in one sense. There is rarely anything approaching perfect data in business. But these companies have massive use and the survey, if not perfectly representational, shows the way some significant users of space now approach reviewing their investments.

In 2022, 21% of respondents pointed to utilization rates, whether average or peak, as the most important one. That’s down from 28% last year. The trio of second place answers took 15% each.

In 2021, 74% of respondents used utilization data. Last year, that was up to 89%. Also, 58% planned to increase their use of utilization in planning. In 2021, 74% of respondents used utilization data for occupancy planning; in 2022 it was 91%.

“These results reflect the increased focus on metrics that measure the space efficiencies of hybrid working,” the report said. “The importance of people density rose 27% year-over-year, while both space-sharing ratios and reservation rates spiked more than 200%. While the emphasis on the cost per seat remained steady, both design density and vacancy decreased 25%, suggesting these metrics will be less meaningful as hybrid working evolves.”

Another way of putting it is that the vacancy rate, the old standard, was a focus on strict finance and asset allocation on the part of tenants and, for the landlord, operational metrics on the other. The move to utilization is a flip. Instead of pure finance on the tenant side, operations take control. And, in a way, for the landlord, it’s gone from operations to finance, trying to understand what occupancy will mean for different companies and then balancing that against the future of net operating income.

This is a shift that has likely been a long time coming, only was sparked by hybrid and work-from-home set off by the pandemic, and likely here to stay for an extended period of time. To use a manufacturing analogy, monitoring the amount of inventory a factory produces is a valid measurement, but it doesn’t approach how efficiently the inventory is used and how well customers are satisfied. The problem, as CBRE puts it, is “measuring a plan versus measuring reality.” And reality is where the dollars and cents lie.

Source: “A New Metric Puts More Pressure on the Office Market“

Sublease space is on the rise for the industrial sector, including some inventory that’s been listed in facilities still under construction.

In addition, an elevated number of spaces greater than 200,000 square feet have been added to the market in recent months, according to Colliers research. The firm’s Amanda Ortiz notes in a new research brief that the amount of available sublease space has risen by nearly 46% since the start of 2022 and is expected to continue to increase this year as occupiers continue to reevaluate space needs.

“Occupiers may have overestimated the amount of space needed to satisfy a just-in-case inventory strategy,” Ortiz says. “Inventory control is beginning to backpedal to fewer days in the warehouse, which could impact industrial demand. As a result, the just-in-case strategy will remain an industrial driver, but companies will utilize less space than previously expected. The excess of space leased during the pandemic seems no longer necessary for some occupiers.

Ortiz notes that manufacturing companies have given back the most space over the last 12 months: space held by those tenants accounts for 27.4% of newly available sublease space on the market.  In addition, retailers and e-commerce companies have added “considerable space” to the market, including outdoor recreation company Coleman’s 1.1-million-square-foot distribution center in the Kansas City market.

Much of the available space is listed in facilities still under construction, Ortiz says, in a trend that suggests pre-leased space is likely already being given back to the market in cities like Atlanta, the Inland Empire, and northern New Jersey.

“With the full pipeline of projects yet to be delivered, overall vacancy will likely increase as new space and additional sublet space is added to the market in the coming year,” Ortiz says. “However, it’s important to remember that although industrial demand is decelerating, occupancy gains remain well-above pre-pandemic levels. While it may seem like a sharp drop in demand, large occupiers including major retailers, 3PL companies, and food and beverage companies will continue to expand in 2023. Thus, the industrial downturn should be temporary, and the industrial sector will remain a desired asset for occupiers and investors alike.”

Source: “Industrial Sublease Space Ticks Up As Demand Moderates“