Monthly Archives: October 2019

Mars Attacks!

As a panel moderator 12 years ago, I asked some of the world’s largest commercial real estate owners and developers, “Has the economic case been made to make your buildings green?”

Not a single hand went up.

I ask that same question a lot today and every hand goes up. The panelists no longer look at me like I’m a little green man from Mars.

This question is considered less crazy today because the economic case for environmentally responsible buildings is now black and white. More and more prospective tenants will not consider occupying buildings that aren’t certified as “green.” The more that big investors see the value of green in their office and multifamily portfolios, the more it will spread as a clear value-add to other commercial asset classes.

I’m proud of the 2019 CBRE Green Building Adoption Index because it now covers multifamily, the No. 1 asset type in America for total investment volume.

Congratulations to Chicago for retaining its rank as the No. 1 green office city and to Denver as the No. 1 green multifamily city. The fact that two large cities top these lists sends an important message that they are great places to live, work and play. Going green is one key to any great city, as detailed in our seminal “Millennials: Myths & Realities” and “Tech 30” reports. It also sends an important message that some of the up-and-coming hipster cities further down on the list must compete with established markets, which should spur even more green development elsewhere.  

Despite this year’s terrific inclusion of multifamily, we will never stop striving to make the CBRE Green Building Adoption Index—and CBRE’s analysis of green issues—even better. In the future, be on the lookout for more in-depth discussion of the following emerging topics:

  • Industrial Real Estate: The fastest-growing asset type in America still lags office and multifamily real estate in green adoption. Future reports will examine how industrial real estate is evolving and which cities are creating an environment for green industrial success.
  • New vs. Retrofit: Most new office and multifamily buildings are being built for green certification and this causes our survey to skew toward those cities that have a lot of new construction as a percentage of total inventory. But there is nothing greener than reusing existing buildings and we should give a “double green” to those cities that have special programs/incentives to re-use existing structures.
  • Building Materials: The U.S. clearly lags the EU in the use and standard of green building materials. New technology that increases the ability to build vertically using wood and modular construction will increasingly be adopted in the U.S.
  • Tall Buildings: The sky is the solution to create efficient buildings, especially affordable housing. Cities that eliminate height restrictions will get an additional gold star in our survey.

We hope you find our 2019 Green Building Adoption Index useful as an investment, occupancy and city planning guide. The green world has seen very positive changes in the past dozen years, and we believe this report will further promote green building adoption. I was proud to be a little green man 12 years ago and I’m even prouder to be joined by a legion of little green men and women today.

Mars has attacked and is winning, but the fight continues!

By Spencer Levy, Chairman, Americas Research & Senior Economic Advisor, CBRE.

Multifamily Starts Rise

Multifamily market performance is influenced greatly by development activity.

The industry has been expecting a decline in construction for a few years, but that slowdown has been slow in coming.

The latest monthly data from the U.S. Census Bureau indicates still high levels of construction, but no significant acceleration.

The Census gives three principal construction measures: units receiving permit approval, starts and construction pipeline (units under construction) for multifamily assets with at least five units (including for-sale product, although the vast majority is rental).

Construction Starts Total 278,000 Units Through Q3

In 2018, construction began on 360,300 units, up 5.1% from 2017. In Q3 2019, starts totaled 99,600 units, a 5% gain y-o-y. Ytd 2019, starts totaled 278,000 units, essentially on par with the prior year (0.2%). Q3 statistics indicate a momentum acceleration.

September’s annualized seasonally-adjusted figure (327,000 units) was down 28.3% from August and 5.8% from September 2018. The directional trend for H2 2019 is not yet clear.

Q3 Multifamily Permits Rise 20% Year-over-Year

Permitting activity also provides an indication of development momentum. In 2018, 427,400 multifamily units received permit approval, about the same as 2017 (+0.6%). Ytd through Q3 2019, 340,600 units were approved, 7.6% above the prior year. Q3’s 121,900-unit total was up 19.7% year-over-year.

At the end of September, the Census reported that 622,000 multifamily units were under construction (seasonally-adjusted rate). The figure represents deliveries over the next two to three years and is up 4.4% over the prior year.

The under-construction total first reached 600,000 in Q3 2016 and has stayed close to that level since, thereby reflecting continued peak development, but no acceleration.

The extended time period needed to complete projects in recent years has also contributed to the high under-construction totals.

Recent Starts Totals Below Prior Cycle Peaks

For the past few years, U.S. multifamily starts have reached high levels for this cycle.

The recent and current totals pale in comparison to the phenomenal development phases of the late 1960s/early 1970s, late 1970s and mid 1980s. In those periods, starts were well above the current levels.

The peak year was 1972 with 906,200 multifamily starts.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Why Concerns Around Rising I&L Vacancy Are Overblown

In the late 2000s, demand for warehousing largely originated from the main supermarkets, high street retailers and the 3PLs. 

The supply chain networks were relatively simple with national warehouses supplying regional facilities or the shops themselves. Very few people owned a smartphone and therefore limited shopping was performed online. 

Today, the online retailers are leading the charge for warehouse space.  Brits seem to enjoy shopping online with the UK spending the most in the world per capita via computers, smartphones, watches, tablets etc.  The office of National Statistics highlighted that in November 2018, during the three week period of the Black Friday and Cyber Monday promotions some 21.5% of all spending was undertaken online. 

The blended average of online spend throughout last year exceeded 18%.  This trend has been increasing year-on-year, with 2019 approaching 20% overall with the upcoming winter promotions likely to see online spend peaking a few hundred basis points above that.

Consequently, take-up levels for large warehouses over the first nine months of 2019 have been strong at 19.40M sq ft. It is likely that 2016, 2018 and 2019 will be the best three years on record, despite the continued  uncertainty surrounding Brexit,  The logistics market has proved to be robust with supply chains adapting to the evolving drivers of demand, most notably the online retailers. 

In the big box world, namely those warehouses that are in excess of 100,000 sq ft we have seen the number increase significantly over the past few years to support the ongoing demand from online retailers. Some analysts have been commenting in the property press that the current vacancy rate in the UK Big Box market is heading towards 10%. 

That is someway off the mark and unfortunately paints a misleading picture.  The question exists as to whether the extent of stock in the market is fully appreciated. It would appear not. 

If an identity parade was created of investors, developers and agents and they were asked to estimate the current stock level, the answers would be wide ranging with the majority understating stock levels, in some instances to worrying levels. 

At CBRE, we have undergone the behemoth task of tracking every big box warehouse in the UK and can reveal with confidence that big box vacancy levels are currently at 5.6%.  We can highlight that UK stock is currently in excess of 450M sq ft.  If the high estimates of vacancy rates recently highlighted in the property press were to be believed the stock level would be below 300M sq ft.   

Today, there are currently 1,667 warehouses in the UK that meet the ‘big box’ criteria.  The majority are at the smaller end of the scale with 836 units of between 100,000 sq ft and 200,000 sq ft.  At the opposite end there are 26 buildings in excess of 1 million sq ft and a further 170 warehouses larger than 500,000 sq ft. These larger warehouses are frequently referred to as XXL warehouses. 

Between 2012-2015 there was only a single deal for an XXL warehouses where the occupier was an online retailer but  in the subsequent 3.75 years there have been 13 online deals for the largest warehouses with an aggregate floor area of 15.617M sq ft.  In total there have been 55 deals for 100,000 sq ft plus warehouses from online retailers since the beginning of 2016 with an aggregate floor area of 25.427M sq ft.

The key question to the food retailers is how they can create an efficient and profitable model for online sales. 

It is currently unprofitable, but the food retailers persist with the primary goal of capturing market share. Only 5.8% of food is bought online although food retail represents nearly half of all retail spending in the UK.  If the food retailers can crack this nut, the level of overall online spend in the UK will increase significantly. 

An advancement of technology is inevitably going to be the answer, an example being Ocado whose Hive picking technology is leading the way.  If the food retailers manage to succeed in building a profitable online offering, then it is not vacancy levels we should be concerned about but rather an acute demand/supply imbalance of warehouse space not helped by a cumbersome planning process. 

A discussion for another day!

By Jonathan Compton, Head of Industrial and Logistics Strategy, UK, CBRE.

Multifamily Housing Still Hitting Home Runs

It’s the time of year when many of us become re-engaged with major league baseball via the playoffs (go Astros!), root for the home football team (the Cowboys, well there’s still hope) AND begin to think about multifamily market performance in the coming year.

All outlooks begin with the economy. CBRE Econometric Advisors (CBRE EA) projects the 2020 GDP at 1.5%. Positive, but it will feel slow compared to 2018’s 2.9% and 2019’s expected 2.3%

Multifamily demand is also fueled by secular trends such as demographics and lifestyle dynamics. The availability, appeal and cost of alternative housing options—such as single-family homeownership—also impact multifamily demand. The secular and housing alternatives drivers in 2020 will be largely unchanged from recent years.

However, millennials are aging, and the vast majority are now in traditional homebuying stages of their lives. Many millennial households will move or consider moving into homeownership, but that path will remain challenging given high home prices and the mismatch between what millennials can afford and what’s available.

For the 66 largest U.S. multifamily markets, CBRE predicts 2020 net absorption to reach approximately 200,000 units. The total is about 25% lower than the 2019 estimate of 271,000 units, but still fairly healthy.

Development activity continues at a steady pace. In 2020, completions are likely to total about 280,000 units, only marginally under the estimated 297,000 units to be delivered in 2019. Evidence of the sustained level of deliveries in 2020 comes from several sources.

CBRE EA’s under-construction total for August was 612,000 units which is only slightly below the March 2019 cyclical peak of 630,000 units. Year-to-date through August, construction starts were up only 0.2% year-over-year according to the Census Bureau, but multifamily permitting activity was up 4.2%.

Fortunately, development activity is becoming more widely dispersed geographically within metropolitan areas and more varied by type of structure (i.e., more suburban and more garden). This dispersion allows for a better match with market demand and gives a “breather” to many of the urban core submarkets which had become temporarily saturated.

Nationally, with demand at 200,000 units and new supply at 280,000, vacancy rates are positioned to rise. From the estimated 2019 annual average of 4.3%, vacancy is likely to climb 40 bps to 4.7%, reversing the downward trend experienced over the past two years.

Even with this increase, vacancy will still remain under the long-term average of 5.1%. Rent growth is likely to ease down from 2019’s estimated annual average of 3.2% to 2.4% in 2020, just below the long-term average of 2.6%.

Next year’s mild cooling in multifamily’s market performance should not diminish the appeal of the sector, and investment should remain very active.

Multifamily housing is playing a larger role in the country’s broader housing environment, and the long-term trends of inadequate single-family and multifamily housing construction given household growth and obsolescence, urban densification and rising costs of urban living will continue to strongly support multifamily housing over the long term.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Bigger Not Always Better

Demand for well-located, small light-industrial properties—less than 120,000 sq. ft.—continues to outpace that for larger warehouses, largely driven by local economic activity, urban population growth and same-day delivery expectations of consumers.

Light-industrial properties account for more than half of total U.S. warehouse inventory. The availability rate for those between 70,000 and 120,000 sq. ft. has dropped by nearly 4 percentage points to 7.4% over the past five years. Consequently, their rents have climbed more than 30% to an average of $6.67 per sq. ft. By comparison, warehouses of more than 250,000 sq. ft. had rent growth of 16% over the same period.

New development has been extremely limited, with completions accounting for just 1% of total light-industrial warehouse inventory since 1990. This dearth is attributable to challenges in developing smaller parcels in densely populated areas, including competition with other uses and high land values.

Strong demand for smaller warehouse properties will continue as retailers and logistics operators expand their networks to increase their proximity to consumers. As such, rent growth likely will continue outpacing that of large bulk warehouses.

Industrial Warehouse Availability Rates by Building Size Segment

Source: CBRE Econometric Advisors, CBRE Research, Q2 2019

Industrial Warehouse Rent Growth by Building Size Segment

Note: TW rent index, which is an estimate of net effective rents, not to be confused with average asking net rents.
Source: CBRE Econometric Advisors, CBRE Research, Q2 2019

Construction Pipeline, Small vs. Large Warehouses

Note: Underway and planned as of Q2 2019.
Source: CBRE Econometric Advisors, CBRE Research, Q2 2019

By Matthew Walaszek, Associate Director, Industrial & Logistics Research, CBRE.

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The Top U.S. Metros for Employment Growth

Orlando experienced the best year-over-year employment growth rate in August among the 41 largest metros in the U.S. at 4.0%, nearly triple the national rate of 1.4%.

New York and Dallas/Ft. Worth led the country for total job growth, gaining, respectively, 134,000 and 116,000 jobs year-over-year.

The metros with the highest rates of job creation remained concentrated in the South and West. Cincinnati continued to lead the 10 Midwest metros with a 2.5% gain. Among the seven Mid-Atlantic/Northeast metros, Boston, New York and Philadelphia tied for highest growth rate at 1.4% (equal to the U.S. average).

The employment growth rate was essentially unchanged from three months ago in over half of the metros analyzed (25 out of 41). One-fifth of the metros had faster job growth than three months ago. Orlando’s growth increased significantly.

Eight (20%) of the metros experienced slower employment growth rates— by less than one percentage point in all instances except for Sacramento and Las Vegas.

Unemployment rates in 26 of the 41 metros were at or lower than the U.S. average of 3.8% (not seasonally adjusted). Boston and Denver had the lowest levels at 2.6%, followed by San Francisco, San Jose and Nashville (2.7%). Nine of the metros had unemployment levels of 3.0% or lower.

Low unemployment represents solid economic expansion. With unemployment at historic lows, labor shortages in a wide array of industries are now common in many metros. Many jobs are not readily being filled, and labor shortages are holding back employment growth in many, possibly all markets.

Employment Percentage Change Year-Over-Year

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.

Investment Rising Rapidly in Age-Restricted Housing

Seniors housing & care is the largest “alternative” asset class based on investment volume over the past decade. Investment in the sector has been particularly robust over the past six years.

Annual buying activity from 2014 through 2018 averaged $17.5 billion. Investment in 2019 is on pace to reach at least $15 billion.

In 2018, acquisitions fell 7.7%. The year-to-date 2019 total slipped 6.2% from the prior year. Interest may have waned somewhat from seniors’ yield premium coming down and from overbuilding concerns (though construction has slowed considerably).

The larger driver for the slowdown in acquisitions activity is likely limited available product to buy, both individual assets and portfolios.

Investment is still relatively small in the 55+/active adult sector but rising rapidly according to Real Capital Analytics’ data, which covers all types of age-restricted income-producing properties, including active adult.

Acquisitions exceeded the $1 billion mark first in 2014 and reached $2 billion in 2018. Last year’s rise over 2017 was impressive at 13.7%.

Buying activity remains robust in 2019, and sales are on pace to exceed 2018’s total by a sizeable margin.

By Jeanette Rice, Americas Head of Multifamily Research, CBRE.