Archives for 2024

Industrial net absorption for the second half of 2024 is expected to reach approximately 114 million square feet, up from 67.1 million square feet absorbed during the first half of the year.

First-quarter absorption was down substantially from its historic peak in 2021 when it totaled 749.3 million square feet for the year, according to CoStar data. It also lagged absorption recorded in the same period last year of 172.2 million square feet.

Absorption in 2025 is expected to be around 249 million square feet, and the figure in the first half of 2026 could be about 154 million square feet, according to the NAIOP Industrial Space Demand Forecast. The forecast assumes a soft landing of interest rates. If a hard landing materializes, net absorption could significantly underperform the forecast, said NAIOP.

With interest rates expected to start coming down over the next month, potential industry leasing activity going forward is substantial. High interest rates are a headwind to developers and investors as well as industrial space occupiers, the report noted.

In addition, retail sales remained strong in July, which drives the need for industrial space, and inventory levels have remained steady year over year.

Recent growth in demand for industrial space can be attributed to the resumed expansion of e-commerce, which reached 15.9% of total retail sales in the first quarter of 2024, up from 14.9% the prior year, said NAIOP. Notably, Amazon is once again expanding its logistics footprint with a significant increase in leasing and acquisition activity. E-commerce requires more space than traditional brick-and-mortar retail and its continued growth should support increased demand for industrial space, even if total retailer and wholesaler inventories remain unchanged, the report said.

As new industrial supply has hit the market, vacancy has risen slightly to 5.9% from 4.2% during the second quarter of 2023. However, asking rents have grown 4.3% year-over-year, consistent with a relatively healthy market, said NAIOP.

It expects rents to continue to grow, particularly in the South, which has absorbed 53.7 million square feet of industrial space. In every other region, completions outpaced absorption, driving vacancies to 6.5%, the report found.

Source: “Industrial Absorption Set To Grow on Rate Drop Expectations”

There’s evidence of some reversal in a pattern of property sales based on size from the middle of 2023.

Similar to the value-weighted and equal-weighted, smaller properties did better in the long run. Investment grade was down 3.4% over the 12 months while the commercial grade was up 6.2%. There is no explanation or speculation on why smaller properties have been doing better. Perhaps it was a result of rising interest rates and price differentials. When financing is more expensive, a less costly property might make a project viable.

In a new Real Estate Alert, Green Street wrote that in the first half of 2024, small property sales growth didn’t hold up as well as large institutional offerings. From January to June, properties in the $5 million to $25 million range fell 10.7% from $44.32 billion in the first half of 2023 to $39.58 billion in the first half of this year, according to the firm’s sales comps database.

Compare that to properties in the $25 million and higher category, where sales activity was down only by 8.6%. It’s the first time since the full year of 2021 that larger properties outperformed the less expensive category.

Green Street said there were a few reasons for the reversal: fewer distressed deals in the small-property space, increased focus by private investors buying more expensive properties while institutions wait out volatility and two giant apartment trades.

Kevin Aussef, president of investment properties in the Americas for CBRE, told Green Street that one reason for the lack of activity among smaller properties is less distress. Many private clients weren’t typically late-cycle buyers and they weren’t typically leveraged with mezzanine debt.

Or maybe there might have been greater opportunities for distressed purchases among larger properties. Over the last year and a half, there have been many major CRE players and analysts discussing the fall of office valuation. And yet, there hadn’t been that many large buildings selling at big losses. But that type of sale is important to finding a bottom.

“Usually that’s the sign that things are about as bad as they’re going to get. When people finally throw in the towel,” Matt Reidy, director of economic research at Moody’s, told GlobeSt.com. “We haven’t seen much of that in the larger transaction space until this most recent quarter. We didn’t see owners selling properties at really large dollar losses, like $100 million from when the property was acquired.”

 

Source: “In Switch, Large Property Sales Outperform Smaller Deals”

The multifamily housing market is showing promising signs of recovery, with recent data from CoStar Group revealing a significant increase in demand and stabilization of vacancy rates.

Absorption rates have notably risen from 118,000 units in the first quarter to 166,000 in the second, fostering optimism among industry experts about a potential shift from decelerating fundamentals to a growth phase. “We’re seeing a very good movement in demand upward from the levels that we saw in 2023,” CoStar’s national director of multifamily analytics, Jay Lybik, told GlobeSt.com. “The spread between supply and demand has been the lowest we’ve seen in the last 11 quarters,” Lybik added.

Despite these positive trends, challenges remain, particularly in the Sun Belt region where oversupply continues to hinder rent growth. As the market navigates these complexities, the outlook for 2025 is pivotal, with expectations for a peak in vacancy rates followed by a gradual decline, setting the stage for renewed investment and expansion in the multifamily sector.

While the market absorbed 166,000 units in the second quarter, 189,000 new units were delivered, leading to a slight increase in the vacancy rate to 7.9% by the end of the second quarter, up from a low of 4.8% in the third quarter of 2021. The vacancy rate is anticipated to peak at 8.1% in early 2025 before declining, according to Lybik.

This anticipated peak and subsequent decline are attributed to improved demand and a slowdown in new deliveries as the construction pipeline contracts.

Meanwhile, rent growth has been modest, with the national rate inching up 1.1% at the end of the second quarter, and is only projected to rise to 1.7% by the year-end. “We think that rents are going to start to increase in the second half of this year,” due to a combination of decreasing supply and robust demand, Lybik said.

The Sun Belt region has been struggling, with the ten worst-performing markets in terms of rent growth located there, led by Austin with a 5.7% drop at the end of the second quarter.

In contrast, the Midwest and Northeast are performing better, with projected rent growth rates of 4.7% and 3.9%, respectively, for 2025.

Market stability has led to increased investment activity, with notable portfolio purchases by Blackstone and Lennar. As a result, institutional investors view the market as poised for recovery and expansion, Lybik said, driven by stable asking rents and a slight decline in the 10-year Treasury yield, which has spurred acquisition interest.

In short, the market is on a path to recovery, with demand outpacing supply, leading to stabilizing vacancy rates and moderate rent growth, Lybik said. “I feel very optimistic about the direction of the market right now… multifamily is definitely poised to go from decelerating fundamentals to stable to expanding fundamentals in the next six to 12 months.”

Source: “New Multifamily Data Points to a Stabilizing Market”

In the shifting post-pandemic work landscape, companies have focused on creating office environments with shared spaces and high-end amenities from catered lunches to modern outdoor spaces, all with a goal of enticing employees back to office buildings.

However, while a majority of workers are interested in working at least a few days a week in the office, it isn’t necessarily these types of amenities that are bringing them back, according to Lincoln Property Company’s latest office report. In fact, what employees say they want in an office space often varies by generation, and no one-size-fits-all solution is likely to be successful.

One thing employees of all generations agreed on is the value of dedicated seats and private offices, signaling a preference for productivity, efficiency and a sense of belonging, the report found. Even Gen Z respondents, who the report identifies as the most likely cohort to value work/play amenities, said dedicated work space is a high-value feature. Beyond office amenities, the traditional motivators to return to the office continue to include increased compensation, workplace functionality, colleague relationships and career development.

“Employees’ strong preference for dedicated workspace underscores the importance of corporate executives listening to their workforce and prioritizing functional and supportive work environments to boost employee engagement and retention,” said Terence Kirk, EVP within Lincoln’s CAS team. “Our survey suggests that continuing to invest in a plethora of upscale amenities that don’t meet these core needs could be a costly mistake for corporate occupiers.”

Commute time is also a key factor in employee attitudes about working from an office. All cohorts included in the study placed a high value on shorter commutes. Approximately three-quarters of respondents say they would not consider going into the office if their commute was longer than 45 minutes roundtrip. Baby Boomers are the most averse to longer commutes, with more than 60% saying commute time as their most important location feature and only 4% considering a commute longer than an hour and fifteen minutes roundtrip.

“Location will become increasingly important for occupiers as they evaluate office spaces, especially as employees weigh the productivity of working at home against the time spent commuting to the office,” Kirk advised.

Overall, 20% percent of workers preferred fully remote work while more than half said they’d like to work in the office four to five days a week, according to the report. Millennials and Gen X respondents showed the strongest preference for in-office work, while Baby Boomers skewed toward a preference for remote work and Gen Z favoring a hybrid arrangement.

Source: “What Employees Want in Today’s Office Space.”