Professor Glenn Mueller, Denver...
...walks us through his latest quarterly report examining the five major real estate food groups, office, industrial, retail, apartment, and hotel, across the country, and where they are in their respective cycles.
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Office: Highly Market Dependent
Demand for office is increasing. The recession is over and all the uses that demand office space are growing. However, technology is changing the way we consume office space. People work from home or use shared office space, and consequently the amount of space required for a new hire has decreased from around 200 square feet, to 120 square feet. Consequently more demand is required to fill space, but with the economy expanding that space is being filled. That said, the office market is highly location dependent because different cities have different industry base profiles that drive the local economies and that is what, in large part, drives office demand.
Industrial: 'Hands Down the Best Property Type Going'
Peak Occupancy Will Continue in Industrial Until 2019
Industrial is in big demand nationwide driven largely by internet sales and the migration from retail to warehouse distribution centers – even though internet sales are just 9% of all retail sales indicating considerable room yet for growth. Occupancy is not at its peak yet but is expected to reach that level by the end of the year this year. Amazon was the biggest consumer of warehouse space last year taking up fully 25% of the entire warehouse supply nationwide. And Amazon are moving from a few huge locations to a more localized format to enable same day delivery schedules, and are being chased by Walmart who are also beginning to expand into a delivery model and consequently beginning to demand warehouse space nationwide.
Apartments: Oversupplied - Watch for Opportunities as Occupancy and Rents Decline
Apartments present a ‘good demand story’ with millennials coming on stream not buying as young as prior generations and so fueling demand for apartments. That said, apartments are also among the easiest to finance and so consequently the pipeline of new product is easy to fill and is being overfilled currently leading to hypersupply. And the hypersupply is primarily at the high end of the cost/rent spectrum, the ‘A’ class developments, so it is that end of the market that is going to see reductions in rent levels first but that will cascade down to B and then to C also as renters trade up to higher quality units as rents reduce overall. There is nothing anywhere nationwide – in the cities studied – that indicates occupancies will be rising; every single market is either at peak, or already oversupplied meaning reducing occupancies and rents. In fact, new supply is 10-20% greater than demand can keep up.
Retail: Dying on the Vine
Good quality retail and shopping centers are doing well, but not much else, and even that is evolving more to being destination entertainment centers. Grocery anchored centers are still a necessity so will continue to do well. Overall though, retail is extremely slow on the recovery, around half that of any other property type, but the good news is that as supply is very low because it is difficult to finance so there are some bright spots on the map for retail as demand has picked up but supply has remained more stable.
Hotel: All Time Historical Peak Occupancy - and Holding
The hotel sector is uniquely the most volatile property type because people rent by the day and so when the economy is doing well people consume hotel rooms but when it is not, they simply stop. But the hotel industry is enjoying some generational changes in demographics where millennials are traveling more than their predecessors and as a consequence are unbelievably profitable right now with an ‘all time best ever peak occupancy of 72.5%’ So with this peak occupancy we are seeing additional supply coming on line with more hotel rooms being built.