(Bloomberg)—The value of U.S. commercial-property deals rose 6.7 percent in the first quarter from a year earlier, but higher interest rates and softer demand for office and retail real estate will weigh on the market in quarters to come, Ten-X Commercial said.
“Heavy supply is looming in the apartment, hotel and industrial sectors, while technological innovation is crimping demand for both office and retail space,” the real estate transaction platform said in a report that looks at data going back more than a decade. Volume for the quarter, which reached $107 billion, was down 14 percent from the previous three months — though companies often rush to close deals before year-end, making for a big fourth period.
Florida is forecast to reach a $1 trillion economy in 2018, but job creation is expected to slow, according to economists gathered Tuesday in Tallahassee for the 2018 Economic Outlook Summit.
Led by the state’s chamber of commerce, summit data showed Florida with a booming market, many incoming residents bringing new income, and a high gross domestic product. A recession is not likely, economists said.
The forecast GDP, or value of all products and services, “is bigger than Saudi Arabia,” said Mark Wilson, president and CEO of the Florida chamber.
If Florida were a country, it would rank 16th in the world, according to the chamber.
U.S. new-home construction declined in April as fewer starts of apartment projects outweighed a modest improvement in single-family structures, government figures showed Wednesday.
Highlights of Housing Starts (April)
Residential starts fell 3.7% to a 1.29 mln annualized rate (est. 1.31 mln) after revised 1.34 mln pace in prior month Multifamily home starts slumped 11.3% after a 13.6 percent March increase; single-family rose 0.1% Permits, a proxy for future construction of all types of homes, fell 1.8% to 1.35 mln rate (matching est.) Report included revisions to housing starts dating back to 2013 and building permits to 2012.
Apartment landlords can no longer raise rents like they used to. So many new apartment units are opening that the percentage that vacancy is inching higher across the country.
This year “will likely remain challenging for many landlords and apartment investors,” says Victor Calanog, chief economist and senior vice president in the New York City office of data firm Reis Inc.
Strong demand for apartments has helped limit the damage from new supply. Apartment rents are likely to keep growing on average through 2019, even though rents are not growing nearly as much as they used to.
“Short of a recession—which not even the Federal Reserve’s Comprehensive Capital Analysis and Review projections are expecting any time this year—apartment fundamentals will likely weather this storm,” says Calanog.
The ranks of “super commuters” has grown in U.S. metro areas, from from 2.4 percent of all commuters in 2005 to 2.8 percent in 2016, according to a recent Apartment List analysis of Census Bureau data. Nationwide, one in 36 commuters are super commuters, meaning that they spend 90 or more minutes traveling to work each day, either hours on public transportation or slogging through traffic.
The share of super commuters is highest in expensive metros with strong economies—New York, San Francisco, Washington, D.C., Atlanta and Los Angeles— and in their surrounding areas. In Stockton, Calif., for instance, 10 percent of commuters travel more than 90 minutes to work each day, the highest share among U.S. metros. New York has a 6.7 percent share and San Francisco has 4.8 percent.
Despite the last two years of decelerating rent growth, the spring season proves its continued strength. After a substantial rent increase in March, which marked the best performance since last summer, multifamily rents in April have once again risen $4 to $1,377, increasing by $10 overall the last two months. Year-over-year, rents have increased by 2.4 percent, but down 20 basis points from March.
The seasonal gain was widespread across major metros, all except for Raleigh. The top growth performers were once again Orlando, which had an increase of 6.2 percent, followed by Sacramento with 5.2 percent, Las Vegas rising 5.1 percent, Tampa (4.4 percent) and Phoenix (4 percent). Warm climates, strong job growth and domestic migration add to the success of these metros, although Sacramento is showing signs of deceleration after years of double-digit growth.
Despite the overall consensus that commercial real estate is in the late stages of its current cycle, investors in the office sector continue to see strength in the sector. Expectations for rents and occupancies remain bullish. And while there is a general sense that cap rates will rise, respondents overall remain optimistic about the prospects for the space.
Those were among the findings in NREI’s fourth annual research survey aimed at gauging sentiment about the office sector for the coming year.
Respondents were asked to rank the relative strength of their region on a scale of 1 to 10. The West (8.2) led the way, followed by the South (7.9), the East (7.4) and the Midwest (6.8). The scores for the East, Midwest and South all rose from 2017, while the score for the West remained flat. The West has been the top market in each of the four surveys NREI has completed on the office sector.
Retail real estate’s troubles in recent years have been well-documented. Online sales continue to eat away at brick-and-mortar activity. Many chains are struggling, forced to scale back on stores or go out of business entirely.
The results from NREI’s fourth retail real estate survey reveal that the outlook from retail operators, investors and developers continues to be bleak. Sentiments on cap rates, occupancies and retail rents all declined from past years. And respondents see retail as having the dimmest outlook of any of the major property sectors.
On a scale of one to 10, with 10 being the most attractive, retail scored 5.5 in this year’s survey. The number has dropped for three consecutive years and leaves retail at the bottom of the list compared to office, industrial, multifamily and hotels. And whereas in past years the spread between the top and bottom property types was not that great, retail’s score in this year’s survey is well below the highest-scoring sector (industrial), which rose to 7.6.
In fact, the scores for those sectors are two sides of the same coin, with industrial’s prospects rising directly in concert with retail’s struggles as the ever-growing volume of online sales fuels the lackluster results at many brick-and-mortar outlets.
Single-tenant office buildings present a greater risk for loan default than multitenant assets because the sole income stream is dependent on one tenant. But there’s advice experts can offer borrowers on structuring leases to help protect their interests if something goes wrong.
In recent years, there has been a rush by investors to acquire single-tenant office buildings, because this type of asset offers better yields than Treasury bonds, says Eric Entringer, vice president of capital markets and investor relations at Dornin Investment Group, a real estate investment firm with offices in Orange County, Calif. and Las Vegas.
He notes that these assets are attracting lots of 1031 exchange investors, as well as investors pulling out of the stock market, but suggests a question they should ask themselves before investing in single-tenant office assets: “Is the risk appropriate in terms of the returns they’ll get over Treasury bonds?”
Apartment investors have been taking advantage of low interest loans through the “green financing” programs offered by Fannie Mae and Freddie Mac. “About 40 percent of our Fannie Mae and Freddie Mac business is green,” says Kyle Draeger senior managing director in the multifamily division of real estate services firm CBRE.
The loans have proven to be extremely useful to value-add investors, who typically renovate properties to improve the income produced by the apartments. So many borrowers qualified for the green incentives in 2017 that federal regulators have raised the requirements for new loans in 2018, and so far this year the green lending business still seems to be going strong.
The “green” programs often slice roughly a third of a percentage point off interest rates offered by the government-sponsored entities (GSEs).