The property markets have entered a new phase in the real estate cycle according to Randy Fuchs, who outlined his views in the latest Coldwell Banker Commercial webcast. In his presentation titled "Momentum Shift: Property Markets in Higher Gear", Randy catalogued important third quarter highlights and trends that included:
The Office sector is the comeback story of 2005. There have now been eight consecutive quarters of positive absorption based on data from Reis, and the year-to-date sum of 39 million square feet in the top 50 metropolitan areas exceeds the total demand for all of last year. Against this backdrop, rent growth was positive for the third consecutive quarter and has increased 2.2% year over year, the first such positive, annual growth in over four years.
Apartments are no longer the whipping boy of commercial real estate. Demand for rentals skyrocketed in the third quarter as the option for single-family housing purchases turned less attractive in the face of higher interest rates, and Hurricane Katrina triggered active leasing in Southern markets. This period's absorption of 36,000 units exceeded the total demand in all of 2004 and led to a sharp decline in the national vacancy rate, to 5.9% according to Reis. As a result, rents rose a robust 1.4% in the third quarter, triple the increase of the prior quarter, with year over year rent growth at a respectable 2.7%. Boxwood forecasts that apartment rental demand in 2006 will exceed 150,000 units.
The defiant Retail sector stays the course. Despite mounting risks to consumers' spending power, Retail property fundamentals remain solid. Rents continued their upward momentum, rising 1% nationally in the third quarter, led by the 1.4% surge in the West region. Nearly half of the 47 top Retail metros had rent growth of 1% or more in the period.
The investment sales market makes history. Through October, almost $190 billion of properties traded hands according to RCA. Year-to-date totals approach the total volume of sales all last year, which was a record. In September alone, the $30 billion in sales was way above any previous high. Apartment sales are up 90% year over year (fueled by condo conversions) and Industrial sales have risen by 83%. It's unclear whether the capital flows into real estate can be sustained at such high levels, as interest rates begin to creep upwards.
For a pdf version of the "Momentum Shift" presentation, click here. To hear a replay of the audio and visual presentation, visit the Coldwell Banker Commercial web site and click on the Webcast link on the home page.