Archives for January 2024

The industrial vacancy rate topped 5% in the fourth quarter for the first time in three years and that trend is expected to continue through 2024 as new supply outstrips demand, according to Colliers’ Craig Hurvitz in a new report.

He said the vacancy rate is forecast to stabilize at around 6.5% during the second half of 2024, while markets with a significant amount of new product relative to the overall industrial inventory may see rates exceed 10%.

Big box space in particular has become increasingly difficult to fill, says Adrian Ponsen, national director of U.S. industrial analytics at CoStar Group. “Those challenges will likely persist during most of 2024,” he tells GlobeSt.com.

Meanwhile, demand for infill space remains strong, says Andrew Holmberg, Partner, Berkeley Partners. “It is taking longer to lease units across the size spectrum, but with the smaller infill units, the vacancy rates remain very low, and as a result operating fundamentals and rent growth continue to be healthy.”

There are 390 million square feet of unleased industrial space under construction across the country set to complete and drive vacancy up further, CoStar estimates.

“The bright side is that most of that space is within projects that have already been under construction for more than nine months, meaning almost all of it will complete construction by summer or fall of this year.

“After that, the number of new developments completing each quarter will sink to a very low level as an after-effect of the sharp pullback in groundbreaking on new projects that happened as 2023 progressed.

“This means there’s a good chance the US industrial vacancy rate peaks later this year, and begins to tighten again after that, particularly if mortgage rates can continue their recent declines. Lower mortgage rates would revive home sales, along with sales of warehouse space intensive goods like appliances and furniture and revive demand for space among tenants in those industries.”

Companies that choose to invest in new construction will be rewarded in 2025 and 2026, predicts Stephen Evans, Managing Director of Black Salmon. “The cost to build has increased due to financing, construction, and land costs, among other factors,” Evans said. “This, in turn, has slowed new construction starts over the past 12 months. However, demand will continue, albeit at a slow pace.”

Rising vacancies, though, won’t necessarily translate into lower rents, Colliers’ Hurvitz said, noting that more rent growth is forecast in most markets in 2024, although at a more tempered pace, closer to historical averages of between 4% and 8%,” he said.

Ponsen said that owners of industrial properties are still benefiting immensely from a rent perspective, since their in-place leases that are expiring are on average, four or five years old, and many are getting renegotiated and renewed at new rents that are more than 40% higher, as the enormous rent gains that occurred during the pandemic are factored in.

Lease expirations like those will continue to pay dividends in 2024, he said.

Source: “Industrial Vacancy Rate Expected to Peak at 6.5% in H2“

Commercial real estate could face a reckoning this year as property values continue to fall, according to Capital Economics.

The research firm pointed to the difficulties commercial real estate faced last year, with property values falling an estimated 11%. Prices are set to fall another 10% this year, the firm estimated, spelling trouble for the mountain of debt backed by commercial buildings.

“Distress is only just emerging and 2024 could be the year the dam bursts,” Capital Economics deputy chief property economist Kiran Raichura warned in a note on Tuesday.

Raichura noted calls of “impending doom” for the sector, especially after banking turmoil tightened credit conditions in early 2023.

“But the evidence so far has been mostly anecdotal and lenders appear to have not been significantly impacted,” Raichura added. “We expect clearer signs of distress in 2024.”

That distress will likely include a swelling number of bankruptcies, mergers, and forced property sales, Raichura warned. Other owners, meanwhile, will continue to “extend and pretend,” he said, implying big commercial landlords could negotiate to push out the maturity date of their loans while they hope for the situation to improve.

Falling prices have hit the office sector particularly hard amid persistent work-from-home trends.

Higher interest rates have also taken their toll. Higher rates push down a building’s net operating income — a building’s total revenue after operating expenses have been subtracted. That can push down property values as well, with Capital Economics previously estimating a 43% peak-to-trough decline in the sector over the coming years.

Higher rates have also made refinancing existing debt much more expensive for borrowers and risky for lenders. That’s a huge problem for commercial property owners, who have around $1.5 trillion of debt that’s approaching maturity.

Source: “Commercial real estate could hit a breaking point this year as falling property values spur bankruptcies and forced selling, research firm says“

King Capital, a local commercial real estate firm, hired Jeannie Randolph as its vice president of business brokerage in 2023 to bridge the gap between a commercial real estate expert and a business broker. Her role involves conducting an in-depth analysis of the finances and assets of a business.

Albuquerque Business First talked with Randolph about what 2024 could entail.

Albuquerque Business First: What are the biggest trends going into 2024 for commercial real estate?

Jeannie Randolph: From a business brokerage standpoint, I still see lots of sellers who want to retire and get out. Financing is tightening, interest rates are much higher than in the commercial market, so the cost of money is very high. What we’ll have to see in 2024 is sellers will have to be willing to do seller financing and carry that note so buyers can get in at a reasonable amount. It is all about being open-minded to put a deal together so a seller can exit and retire and a buyer can come in and take over.

How has the Covid-19 pandemic changed the CRE landscape? Owners got smarter. They figured out how to run their businesses with less and do it more efficiently. Less employees, less costs. That goes right to the bottom line to make businesses more valuable. I have certainly seen in the last year from doing business evaluations, the value of businesses is going up because the owners have figured out how to streamline operations, and that has been just a side effect or result coming out of Covid. They had to do more with less.

Source: “King Capital broker says this will be key part of deals in 2024“

It has been 36 years since the U.S. had so many apartments available for rent, according to a new RealPage report. And the effect has been predictable: rents have fallen in markets where there has been the most growth, even though demand has rebounded.

Indeed, in 4Q 2023 —a traditionally slow quarter – 58,000 apartments were absorbed. It was the strongest fourth quarter in 25 years, excluding 2020 and 2021. Even so, it was 11,000 below the average since 2000.

For 2023 as a whole, 234,000 units were absorbed – a figure closer to pre-Covid norms, the report stated. Completions totaled 440,000. That boosted supply to the highest levels since 1987 and pushed apartment occupancy down 80 basis points year-over-year to 94.1% — still within the long-term normal range.

Demand was driven by cooling inflation – including lower rents – and improved consumer confidence, the report noted. “Renters suddenly have far more options than they’ve had in recent years, and that’s putting downward pressure on rent growth,” said chief economist Jay Parsons.

Effective rents scooted up just 0.3% in 2023. Fortunately for investors, that level appears to have stabilized, ending a downward trend. However, the report noted, “One big question for 2024 is whether rents nationally will continue to hold flat as completions accelerate. Another 671,000 are scheduled to complete in 2024, after which supply should thin out dramatically.” If that happens, it should enable occupancy and rents to climb in 2025 and 2026.

As in previous reports, RealPage found a clear link between the number of apartments available for rent and rental rates. Some 40% of U.S. metro areas saw rents slide, particularly where supply grew. This was especially true in the Sun Belt and Mountains, which together accounted for 70% of national apartment demand and where 62% of the new apartments were built. On the West Coast, only Seattle ranked high in apartment demand. For the region as a whole, where 10% of the nation’s new apartments were built in 2023, new demand rose only 4%.

“In these ultra-high supply areas, we’re seeing the impact to rents even in the Class B and Class C space,” commented Carl Whitaker, RealPage’s senior director for research and analysis. Six metros in Florida wound up in the nation’s top 10 for rent cuts in 2023. Other steep drops of four to six percent occurred in Austin, Boise, Atlanta and Phoenix.

In contrast, one-third of metros, mainly in the Midwest or Northeast, which saw little construction, enjoyed rent growth of 3% or more. In these regions, only two metros experienced rent cuts.

Source: “Apartment Supply to Thin Out Dramatically After This Year“