Here's How CRE Sectors Performed In Q1
Commercial real estate investors are closely eyeing the performance of core assets in their markets to determine their next move. The expert outlook for the industry this year was mixed, and Q1 performance remained in line with those projections — for the most part. Next is a quick snapshot of how the retail, office, industrial and hotel sectors fared in Q1.
The industry is undergoing one of the strongest waves of consolidation since the Great Recession as competition with e-commerce and slumping same-store sales force companies to shrink their real estate.
Shopping center vacancy rates (not including malls) remained flat in Q1 at 7.3%, the same rate averaged in Q3 and Q4 of 2016. Occupied space remains level in this sector despite the wave of store closures and retail company bankruptcies. Average asking lease rates in the quarter averaged $20.43/SF, according to Cushman & Wakefield, down from Q1 2016’s $21.33/SF. The slowdown has spread to luxury retailers as well. High-end brands are suffering from a big drop in international travel and shoppers amid President Donald Trump’s travel ban, with Tourism Economics estimating up to 6.3 million lost visitors.
Office demand slowed in Q1 as net absorption (which reflects the change in occupied space) fell 39% year-to-year, the least amount of space absorbed nationally within the past five years.
Commercial real estate experts started the year off optimistic about potential economic growth for the year, expecting Trump’s push for tax cuts, infrastructure spending and financial deregulation to spur additional growth. Though much of that policy reform remains in limbo, the economy continued its slow trek toward recovery in Q1, benefiting from strong job growth in the beginning of the year.
Job growth in January and February was spurred by uncommonly warm weather, Cushman & Wakefield reports, with payrolls up more than 215,000 jobs for each month. March job gains did not fare as well; the economy added only 98,000 jobs last month.
Despite the dip, the labor market remained a bright spot in the economy in Q1, with office-using employment (which includes jobs in the financial, professional and business services sectors) up for the quarter. The U.S. added 181,000 office-using jobs this quarter, C&W reports, up from Q4 2016’s 153,000 new additions. Office vacancy rates remained somewhat flat in Q1 year-to-year, dropping to 13.2% from 2016’s 13.4%, while net absorption and asking rents saw a boost.
The latest STR data reveals the first three months of this year were a bright spot for the sector. Robust occupancy rose 0.9% for the quarter, spurred by increased demand driven by events such as President Donald Trump’s inauguration, the 2017 Women’s March and Easter. Average daily rates and RevPAR also saw gains, with ADR jumping 2.5% to $124.47 and RevPAR up by 3.4% to $75.92. Strength in these metrics propelled the sector to one of its strongest first quarters on record, according to STR vice president of operations Bobby Bowers.
New supply is expected to cause headwinds for the sector, with supply anticipated to outpace demand in a handful of markets. Supply growth increased 1.9% for the quarter, signifying the largest jump for any quarter since Q2 2010.
The industrial sector was booming in the first quarter, making for a record-breaking 28 quarters of net occupancy gains, Cushman & Wakefield reports. The strength of the sector is powered by robust demand from e-commerce companies looking to shore up their online business by buying distribution centers and warehouses closer to large populations of consumers. The sector absorbed 53.8M SF in Q1, up from the pre-recession quarterly average of 49.3M SF, but down 14.4% year-to-year. Despite the drop, net absorption has surpassed 1.3B SF added since 2010, the longest expansion on record. The national vacancy rate declined as well, dropping 5.3% (or 20 basis points) from Q4 and down 80 basis points quarter-to-quarter.
