Monday Morning Scoop - CRE Supply and Demand Fundamentals Will Even Out in Long Run

CRE Supply and Demand Fundamentals Will Even Out in Long Run

As long as new demand outpaces new supply, vacancy rates go down and rents go up and all is good.

In this shifting commercial real estate environment, John Chang, senior vice president of research services, Marcus & Millichap, looked at the current health of each asset class and offered a forecast.

Supply and demand outlook for apartments, retail, industrial, and most niche property types remain promising, especially on a long-term basis.

CRE completions should taper in 2024-25 and because the cost of construction loans is too high (8% and above), so new construction starts have been declining.

Because construction times are a year or more, many will be pushed to the following year, meaning the volume of completions is likely to ease.

Some developers are putting plans on hold until the cost of capital comes back down. That doesn’t mean they won’t be built eventually.

Looking at demand factors, generally speaking, Chang said job formation, population growth, household formation, changes in household incomes, and migration patterns are drivers.

On the supply side, CRE valuations can still weaken if supply outgrows demand – something he said happens late in a growth cycle.

Checking In on Each Asset Class

Office was expecting only a 1% growth, but the demand was even slimmer. Vacancy rates are rising in every major market.

Retail construction is even smaller than office, with a half-percent of growth this year, and it’s mostly represented by single-tenant, build-to-suit properties.

Retail space demand is strong. Vacancy rates are moving down and are back in alignment with pre-pandemic levels. Rents are rising by 4% and are 10% above where they were at the end of 2019.

Apartment construction is huge. Several developers are behind schedule and completion dates are slipping because of a lack of labor and materials, pushing them to 2024. This is a positive for the sector because vacancies are on the rise due to inflation stalling household formation. Consumer sentiment has been rising since 2022, so, trends are going in the right direction now.

Industrial is expected to experience a record pipeline. Pace is dragging out a bit, though. This is a positive, as absorption has lost some momentum.

Retailers are shrinking their safety inventories because supply chains are betting better. So, retailer expansion and new openings should revive demand next year.

By: Richard Berger
Source: GlobeStreet