The Truth About CRE in Q2

CBRE Group has released its second-quarter CRE market report and revealed a few surprises about the commercial real estate market.
Jeffrey Havsy

Jeffrey Havsy, CBRE

CBRE Group, Inc., has released its Q2 CRE market report and revealed the U.S. commercial real estate market has exhibited strong momentum across all property types in the second quarter of 2015.

“Commercial real estate is in a sweet spot right now. The market isn’t too hot or too cold. There are steady market improvements at a sustainable pace,” Jeffrey Havsy, CBRE’s Americas chief economist, told Commercial Property Executive. “We all know that real estate is prone to extremes (booms to bust), but we are currently in a good place.”

The report shows that employment is a major driver of apartment demand and U.S. economic growth has contributed to the strong demand we’ve seen in the last several years. This has translated into relatively tighter markets with low vacancy and strong rent growth.

“There are also questions surrounding the falling homeownership rate—which is at a 20-year low—and whether would-be buyers are continuing to rent,” Havsy said. “A number of factors contribute to the downward trend in homeownership: the repair to household balance sheets since the recession, a lack of available inventory of for-sale homes, tight lending markets; though, it isn’t clear to what extent this is impacting the multi-family markets.”

The office vacancy rate reached its lowest point since the third quarter of 2008, while vacancy dropped to 13.5 percent with a decline of 40 bps and improvement remained broad-based across the U.S. office markets. The South and West regions saw the greatest improvement over the past four quarters, with notably strong performance in San Jose, Nashville, San Francisco, Richmond, Orange County and Austin.

The U.S. industrial real estate market has now seen flat or declining availability rates for 21 consecutive quarters, the longest stretch since CBRE began tracking the national market in 1989.

“The large (top 10) industrial markets are doing particularly well. They benefit from being near the largest metro areas, or serve as a distribution hub for goods moving throughout the country,” Havsy added. “This is where we are seeing the bulk of new construction so far in the cycle, notably in the big-box warehouse space. Secondary markets are also performing well, however, especially as investors are forced to reach outside their typical sandbox in search of value.”

According to Havsy, in many markets across the country, space is very hard to come by, for both potential tenants and buyers.

“If it’s available and adequate it’s getting snatched up. This isn’t sustainable long term, but will help as higher levels of new supply are brought online,” Havsy said. “I wouldn’t necessarily call it strong momentum for the retail sector specifically but I do think the economic drivers of demand for retail sales—examples: a tightening labor market, rising real wages, low gas prices—are in place to provide support to the sector once consumers are less cautious about spending. As seen in the most recent sales statistics, this hesitation is still playing a large part in preventing sustained sales momentum.”

The report shows that many East Coast port markets are currently undergoing infrastructure modifications to accommodate larger ships passing through the Panama Canal beginning next year. The structural change from ecommerce/omni-channel is prompting opportunity in smaller light industrial/infill locations close to [higher income] population centers.

“We are forecasting a continued increase in demand for space, supported by the strengthening economy and steady job growth,” Havsy concluded. “Demand will outpace supply and continue to bring down availability rates and drive rent increases (especially for retail). The supply pipeline for industrial is increasing, but that will relieve some of the pressure from pent up demand where tenants are having difficulty finding the space they want in the location they want.”