WASHINGTON, DC—In the near term, this winter’s weather has taken a toll on US economic activity. In the long term, economic fundamentals remain “solid” and the implications for the various commercial real estate sectors are favorable, Cassidy Turley says in a new report. Similarly, Fitch Ratings in a series of property-type snapshots said last week that the various sectors are stable or, at very least, stabilizing.
“The polar vortex, ice and snow storms in the South, colder than usual conditions in the Midwest and a major drought in parts of California all contributed in skewing a variety of indicators from job growth to home sales to retail sales—and pushed them artificially downwards,” says Kevin Thorpe, chief economist at Cassidy Turley. “But we need to take into account the seasonal distortions and not lose sight of the economic trajectory that began taking shape in the second half of 2013.”
Real GDP grew by 3.7% in the last six months of last year, he notes, representing the strongest rate of growth in nearly two years. “Barring any exogenous shocks, we should see GDP return to that rate of growth once the odd weather cycle subsides.”
Subtitled “Look Through the Snow at the Fundamentals,” CT’s February US Macro Forecast says the company’s outlook for CRE remains upbeat. “There will be widespread disparities from market to market and building to building, but in general, demand for US commercial space will continue to accelerate in 2014,” the report states.
Looking at the major food groups sector by sector, CT notes that office is “evolving,” with buildings suited for the next working generation geared more toward “mobility and remote access, collaboration and openness.” That type of product tends to be class A, and net absorption of class A space last year was more than five times greater than in B or C properties, the report states.
It’s just such an evolution in office space that counts as one of the sector’s liabilities, says Fitch, which rates office as “negative to stabilizing,” the slowest to recover of those the ratings agency evaluated in last week’s report. “Improving space utilization,” which the firm defined as new technologies and more collaborative benching build-outs that allow more efficient use of space by tenants, will soften future improvements in occupancy, according to Fitch.
Fitch did not offer a snapshot for industrial, but one of the points it raised about retail—the rise of online sales—certainly bodes well for the industrial sector. In fact, CT says, “Nearly every major metro in the U.S. reported above average industrial absorption rates” last year.
“Data centers and large big-box distribution centers that cater to e-commerce, logistics and retail, continue to be the primary demand drivers for industrial space,” the firm reports. “With industrial vacancy approaching pre-recession levels, and demand for space still going strong, we expect the next major construction wave to begin in 2014.”
Looking at retail, CT spots two trends that are likely to become more pronounced: “the competition of e-commerce sales with retail sales and diverging performance in the luxury, mid-market and bargain retail sectors.” Although e-commerce currently comprises just under 6% of total retail sales, “the aggressive upward growth, which has averaged 12% each year since 2001, is expected to continue throughout the next decade.”
Then there’s multifamily, which Fitch predicts will remain stable this year with regard to vanacy rates, and only small increases are expected through 2018 Expect rates to be flatter in 2014 compared to previous years. However, Fitch’s report noted that developer confidence continues to be strong, and this has resulted in supply growth and projected increased vacancy in some markets.
In CT’s view, concerns of a bubble may themselves be inflated. “If one takes into account the demographics—Echo Boomers and Baby Boomers are now entering prime-rental stages—along with the fact that developers had been underbuilding homes relative to household formation norms by 40% for five straight years, the worries of overbuilding are mostly overdone. Certain markets will see vacancy jump over the next two years, but the elevated vacancy levels will be brief.”
The CT report did not examine the hotel sector, but Fitch says lodging’s outlook is stable. “RevPAR is now exceeding prior peak levels in certain markets,” and overall Fitch is expecting mid-single-digit growth in RevPAR this year. The healthy share of new CMBS issues backed by hotel properties both speaks to the sector’s vitality and poses a note of concern: “Fitch Ratings is cautious when determining whether current revenues are sustainable through the loan term.”