The property markets closed out a solid recovery in 2005 and, according to Randy Fuch's analysis during the latest Coldwell Banker Commercial webcast, further improvements lie ahead. Important highlights and trends of Randy's session titled "Two Thumbs Up:
Recovery in the Property Markets" include:
Chill in Residential Housing Bodes Well for Apartments - The apartment sector is finding its footing as the single-family and condo markets cool down. Sales of existing (older) as well as newly constructed single-family home are declining, which is ramping up inventories of unsold homes. In January, for instance, the number of new homes for sale rose to a record, representing a 5.2 months supply, the largest backlog of homes since November, 1996. Similarly, while condo conversions are soaring – almost 200,000 during 2005 according to RCA - existing condo sales are dropping: down 11% in January and almost 8% below levels of a year ago. In this wake, apartment demand is rising and vacancies, at an aggregate 5.7% in fourth quarter, are narrowing. Rents, in turn, were up 0.7% nationally in the last period and 3% year-over-year according to Reis, with a particularly sharp annual increase of 4.2% for the West region. Boxwood forecasts 100,000 units of net absorption for the U.S. in 2006, which will lower vacancies by
40 basis points.
Office and Industrial Markets Bounce Back - With nine consecutive quarters of positive absorption, the office sector's recovery appears to be locked into place. Demand totaled 14.5 million sq. ft. in the fourth quarter per Reis, and the year's total absorption of 55 million sq. ft. was over a 50% increase over the total volume in 2004. Office construction levels are immaterial, and the 29 million sq. ft. put in place in 2005 was the second lowest output since 1996. The slow recovery, coupled with inflated costs of construction materials and labor have made it much harder for developers to justify breaking ground, especially in light of current rents. Vacancies nose-dived as a result, down 41 basis points in the quarter to 14.6% nationally, down 170 basis points for the year. With demand outpacing supply, rents were rejuvenated, up 3.4% for the year – the first time they were positive on an annual basis since 2000. Boxwood forecasts that demand will continue in '06, and the national vacancy rate will decline more than 100 basis points to
13.4% by end of year.
The industrial sector posted similar gains during last year. As businesses increased capital expenditures and manufacturing turned up, warehouse demand rose to 57 million sq. ft. in fourth quarter, and the almost 200 million sq. ft. of absorption for the year was the highest level achieved in at least 11 years according to data from Torto Wheaton Research. Though supply increased, vacancies continued to contract, down 30 basis points in fourth quarter and 130 basis points overall, to 10.0% overall. Industrial rents began to percolate as a result, up 3.3% for the quarter and a robust 5.2% for the year.
Boxwood anticipates that rents will be up 2.5% in 2006, as vacancies decline 40 basis points to 9.5%.
Retail Remains in Fashion - Despite the naysayers who claimed that consumers would flinch and sharply reduce visits to the mall, consumer expenditures stayed aloft and the retail sector pulled off another year of outpeformance. Demand for shopping center space totaled 7 million sq. ft. in fourth quarter and 24 million for the year, the highest total since 2000. As demand and supply remained in equilibrium, national vacancies barely budged ending at 6.5%. Some areas of the country, especially California markets in the West, are booming, and regional vacancies at 4.2% are at historic lows. It comes as no surprise then that average rents for the nation jumped 1% in fourth quarter with a 3.4% annual rise - the largest increase since 1998 according to data from Reis. As a sign of the sector's continued stability and growth, 41 markets had positive rent increases in the last period, inlcuding 20 had price increases of 1% or more. Boxwood forecasts 3% increases in rents in 2006, and further tightening of vacancies
to 6.2% by year end.
Investment Sales Hit the Roof - RCA reported a record $270 billion of properties traded hands in 2005, up almost $90 billion from 2004 representing a 50% increase. Over 12,000 properties were sold, a 39% increase overall, including jumps of 60% in the sale of apartment and industrial properties. Cap rates dropped in aggregate by 66 basis points - with industrial the individual winner with cap rate compression exceeding 100 basis points. As prices have soared in major markets, some secondary and tertiary markets gained favor as investors sought better risk-adjusted returns. With the tremendous run-up in property prices over the last couple of years, the outlook for investment real estate may not quite so rosy in 2006. One spillover of this investment fervor has been the privatization of REITs, which totaled a record $28 Billion in 2005. This trend, which continues into 2006, reflects a form of arbitrage between valuations recorded in the private versus the public
REIT market.
For a pdf version of the "Two Thumbs Up" presentation, click here . To hear a replay of the audio and visual presentation, visit the Coldwell Banker Commercial web site and click on the Viewpoint webcast link on the home page.
