The research firm Reis Inc. releasedits quarterly real estate data this week for the office, multifamily and retailsubsectors. Perhaps the most notable data point was the vacancy increase in multifamily— the third straight quarterly uptick, which Reis Senior Economist and Directorof Research Ryan Severino said in an interview represents a marked turning pointfor the subsector, generally an investor darling through the recovery.
S&P Global Market Intelligencebelow lays out the main takeaways.
Multifamily taking a slow turn
The nationalmultifamily vacancy rate ticked up for the third straight quarter in the first quarter,representing a marked turning point in the market that can no longer be ignored,according to Reis Senior Economist and Director of Research Ryan Severino.
"Ifthere were any doubts about rising vacancy in the apartment market they should nowbe put to rest. … This is the beginning of an upward trend in vacancy that shouldpersist for at least the next five years," Severino said in a news release.
At theend of the first quarter, multifamily vacancy stood at 4.5%, an increase of 10 basispoints quarter over quarter and an increase of 30 basis points year over year.
To besure, the apartment market will remain somewhat tight in the near term, particularlyin core urban markets. But demand is not limitless, and with new construction outpacingnet absorption by ever wider margins, one can expect availability to continue torise, Severino said in an interview. Over the previous 12 months, 200,142 unitswere completed — the most new construction over a one-year period since 1988.
Severinosaid urban markets will likely bear the brunt of the upswing in vacancy, given thatthey were where most of the new construction has taken place. There are plenty ofpeople looking to rent, but no extant demographic trend will be enough to resolvethe supply-demand imbalance that is brewing.
"We'vebeen drinking from the fire hose, and that can't go on forever," he said.
For thefirst quarter, net absorption totaled 30,838 units, while 41,769 new units weredelivered — the highest quarterly tally for new deliveries since Reis began trackingdata quarterly in 1999.
Askingand effective rents increased 0.4% and 0.5%, respectively, in the first quarteron a sequential basis. The movement represented a marked slowdown relative to therent growth of previous quarters and the lowest level of rent growth since the 2011fourth quarter, Severino said.
"Althoughseasonality plays some role in this, the rising vacancy rate due to increasing levelsof new construction is likely amplifying those seasonal impacts," he said.
Office on the up and up
The slowbut steady decline in office market vacancy continued in the first quarter, falling10 basis points quarter over quarter to 16.2%.
Yearover year, office vacancy was down 40 basis points. The metric has fallen in sixof the last seven quarters and remains at the lowest level since the 2009 secondquarter.
"Giventhe relative weakness during this recovery phase, it is realistic to expect thatany acceleration in vacancy compression will occur gradually and inconsistently.… Though technically a slight slowdown versus the fourth quarter's [decline of]20 basis points, the increased consistency in vacancy compression, coupled withthe ongoing gains in the labor market, portend stronger vacancy compression in thefuture," Severino said.
Net absorptionin office totaled roughly 10.1 million square feet during the first quarter, whilenew construction came to roughly 6.1 million square feet.
The nationaloffice market absorbed 45.2 million square feet over the previous 12 months, morethan any other 12-month period since 2007, before the onset of the financial crisis.
Askingand effective office rents both registered a 0.9% increase sequentially in the firstquarter — the 22nd straight quarter of growth for both metrics.
New YorkCity was the tightest office market at the close of the first quarter with a vacancyrate of 9.1%, followed by Washington, D.C., with a 9.2% vacancy rate and San Franciscowith vacancy of 10.2%.
In retail real estate, 2016 will likely be the best year sincethe recession, buoyed by the steady economic recovery and slow but consistent improvementin fundamentals, Severino said.
Vacancy levels remained unchanged, however, quarter over quarter.Regional mall vacancy remained at 7.8%, and neighborhood and community shoppingcenter vacancy remained at 10.0%.
"Thought not a technical decline in the vacancy rate, themarket continues to move in the right direction with demand consistently outpacingnew construction," Severino said of the neighborhood and community shoppingcenter space, in particular. "Although the national vacancy rate barely declined(by just 10 basis points) during the last 12 months, a lot of incremental improvementsare gradually adding up to more substantial changes over the long run."
For neighborhood and community shopping centers, asking and effectiverents grew 0.5% and 0.6%, respectively, quarter over quarter and 2.1% and 2.2% yearover year. Mall asking rents grew 0.5% sequentially during the quarter and increased2.2% year over year.
Both the mall and shopping center spaces continue to be definedby a performance gap between high-quality properties and lower-quality ones.