What’s Happening in Real Property?

January 22, 2018

Valuations in real property have done incredibly well since the great recession.  Overall U.S. property prices have surged almost 86% since 2011, according to data from Real Capital Analytics.  More recently the U.S. National All-Property Index rose 9.1% in the 12-month period ending November, 2017. The apartment and industrial sectors performed strongly, rising 10.2% and 9.8% respectively.

While price levels have been strong, volume now seems to be waning, with U.S. deals down 31% year-over-year in November.  The overall figures mask some important sectors trends. The industrial and senior housing sectors have remained strong.  The driving force in industrial warehousing is growth in e-commerce which creates demand for storage within reach of consumers.  Senior housing is driven by the increased need for specialized housing and care as Baby Boomers age. On the other side of the coin, fewer deals are being seen in the hotel sector, even though fundamentals for hotels remain strong in terms of occupancy and room rates.

Here is a quick summary of trends in certain property markets.

Multifamily

Investors continue to have a strong appetite for multifamily properties.  In 2017 rental rates grew nationally by 2.5%, with Atlanta experiencing 2.6% growth despite significant new construction over the last few years. Enthusiasm for the multifamily sector has been the result of positive demographic trends, population growth, and changing consumer preferences. New renter households increased by 9 million in the last 10 years – the largest decade increase on record. Investors comment regularly about the risks of the currently high valuations of multifamily property, and the possible impact of rising long-term interest rates. These concerns could be mitigated by demographic trends, but only time will tell how this real property sector fares if long-term interest rates trend back to 3.5-4.0%.

Retail

In the retail sector much is changing, with more and more consumers using e-commerce solutions for their shopping needs.  Mixed-use properties, or “street retail”, have become the darling of retail as investors move away from traditional shopping centers and enclosed malls.  Years ago mixed-use was seen as a sub-category with little institutional demand.  Today, institutional fund buyers are paying up for street retail in dense urban areas.  At the same time traditional shopping malls have suffered. In 2017 almost 7,000 stores closed, which was a 229% year-over-year increase.  By comparison, only 3,433 new store openings were announced in 2017, which was a 50% increase.

Industrial

As noted above, industrial has been a big beneficiary of increasing e-commerce activity.  Over the past two years industrial rents have grown more than 5.5% annually in the top markets.  Much of the demand stems from the fact that each item sold online requires three times more storage than an item sold in a traditional store.  Logistics warehouse facilities are in great demand causing industrial rents in 2017 to rise to all-time highs.  Who would have thought that storage facilities and property on the outskirts of our metropolitan areas and would be in such demand?

Gary B. Martin, CFA