Commercial Investment Real Estate Spring 2020

BY THE NUMBERS WITH By Victor Calanog, PhD, CRE, and Natalia Morton ALL IS (MOSTLY) WELL IN INDUSTRIAL Strong market fundamentals point toward continued growth in 2020. A t most gatherings of industry profes- sionals in the multifamily and com- mercial real estate space, at some point you’ll hear a variant of this question: In which property type are you placing bets, given where we are in the cycle? Aside from multifamily, the next most-often mentioned property type is industrial. “What is depress- ing retail fundamentals is helping boost de- mand for industrial,” said one panelist at the Mortgage Bankers Association Commercial Real Estate Finance Convention and Expo held February 2019. This observation is, to a large extent, true. Unlike the retail (or even the office) sector, where vacancies have barely fallen by 100 basis points over the last seven to nine years following the last recession, industrial vacancies have fallen by anywhere from 400 to 600 basis points. Asking and effective rent growths at the national level have also risen at a healthy clip, between 3 to 4 percent per year over the recovery period from 2012 to 2017. If you limit coverage to Class A industrial space, you’re looking at national effective rent growth between 5 to 6 percent per year over the same time period. These figures are two to three times the growth rates experienced by office or retail, rivaled only by multifamily in 2015, its peak year of rent growth. 1.2% 10% 0.8% 9% 8% 0.4% 7% 0.0% 4Q 2016 1Q 2Q 3Q 2017 4Q 1Q Source: Moody’s Analytics REIS 12 COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 2Q 3Q 2018 4Q 1Q 2Q 3Q 2019 4Q Warehouse/Distribution Trends in Effective Rent Growth and Vacancy COUNTERVAILING FORCES Significant improvements in market funda- mentals over a sustained period, of course, signal developers to bring product to market. Consider the warehouse/distribution sub- sector, which is often the subject of optimis- tic discussions regarding urban infill loca- tions for last-mile operations by retailers like Amazon. The national vacancy rate fell from 14 percent in 2010, right when the recession ended, to a low of 9 percent in 2017. That same year, construction figures broke 100 million square feet — as it has consistently done every year through 2019. As a result, vacancy declines vanished, and asking and effective rent growth fell from highs of 3.7 percent and 4.4 percent, respectively, in 2017, to below 3 percent for both 2018 and 2019. Vacancies began to tick upwards to 9.4 percent in 2018 and ended 2019 at 9.9 percent. Additions to inventory outpaced net absorption, and no respite is in sight for 2020 as another 100 million sf are slated to come online this year. THE SKY IS NOT FALLING Still, a moderation in fundamentals amidst strong supply growth need not signal a major cause for concern. “All remains solid despite new supply outpacing absorption in 2019,” writes CCIM Institute Chief Econo- mist K.C. Conway in a recent note. “A lot of this new supply is pre-leased under non-dis- closure agreements so [it’s] treated as spec.” Economic demand as measured through SPRING 2020

Commercial Investment Real Estate Spring 2020 | Page 14