By Dees Stribling, Contributing Editor
The U.S. economy in the first quarter of 2015 seems to have been a little soft. Employment growth wasn’t as robust as during the fourth quarter of 2014, US GDP didn’t grow as much as in previous quarters (and not just because of the crummy winter on the East Coast), and various other metrics were softer, such as manufacturing output and retail sales. Yet most of the commercial real estate market had a reasonably good first quarter, according to CBRE’s big-picture report on the industry, which was released on Monday. Most of real estate’s major metrics, at least the national averages, were stronger early this year than in 2014, though naturally there’s a lot of local variation.
One of the main drivers in the U.S. office market is business confidence. The expansion of the economy seems to have reached a point at which businesses that had previously been reluctant to expand, even as demand for their goods or services expanded, are now more willing to hire more people, and thus take on more space. There isn’t an absolute correlation any more between business hiring and space demand (space is pretty tight for employees these days, and word is that Millennials don’t mind), but there’s only so much densification office-space users can do. In any case, CBRE reported that vacancy fell in 41 of the 62 metro markets it tracks, rose in 18, and remained unchanged in three. Absorption of office space during the quarter was 9.5 million square feet, with suburban markets driving the overall improvement with a decline of 20 basis points to a vacancy rate of 15.4 percent.
The retail market, another animal all together, has suffered a slow recovery from the recession, and arguably is also suffering from a paradigm shift in the way people buy things, and in the way the American economy is dividing along less egalitarian lines. Certainly some sectors have been caught on the horns of these shifts—such as video or book stores in the first case, and the current Charlie Brown of the retail world—the department store sector—in the second case. Even so, noted CBRE in its report, retail has seen some improvement overall. Retail availability remained unchanged between Q4 2014 and Q1 2015, but availability at the end of 2014 was 50 basis points below a year earlier and is now 180 bps below the post-recession peak of 13.3 percent. CBRE said that 34 of the 62 markets tracked had availability declines in Q1 2015, while 28 recorded flat or increasing rates.
The question for the apartment market now is, Where does it go from up? So far, further up. Apparently there’s still room for more occupancy and rent growth. Some sectors just get lucky. First there was the recession, which (after the initial shock) drove a lot of demand for apartments, while at the same time put the kibosh on a lot of early 2010s development, sometimes simply because lenders were too timid. Development’s picked up in recent years, but there’s still a lag in supply.
But that’s not all. Apartment owners and developers are also fortunate in that a very large generation is coming of age right now, and they want to form households, just like previous generations. Unlike previous generations, they’re not being paid as much while at the same time are carrying a Sisyphean load of student debt. It’s a recipe for more demand for rental housing. CBRE reported that that apartment demand continued to grow in Q1 2015, with the multifamily housing vacancy rate declined to 4.5 percent, a 40 basis-point drop from a year earlier. With occupancy remaining high by historical standards, effective rent growth is expected to stay strong well into 2015.