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Mid-Year Review on the National Industrial, Office and Retail Markets

8/11/16

Hereís a quick overview of the national industrial, office and retail markets for the second quarter of 2016, based on the latest reports from real estate services firm Lee & Associates. The reports were compiled by Leeís research department and the data was provided by the firmís office locations in the West, Southwest, Midwest, East and South and Southeast regions.

The US industrial property market posted another slate of good numbers in Q2. Despite economic indicators that have been sporadic at best, the industrial property market has been consistently strong. Net absorption has been positive in every quarter dating back to 2010. New deliveries have been running very close to total net absorption, which has kept the risk of overbuilding very low and vacancy in steady decline.

The national vacancy rate for warehouse and flex space combined has been falling steadily, and that trend continued in Q2, as the amount of vacant space declined by another 10 basis points to finish the quarter at 5.9%.

Vacancy declines have average asking lease rates moving higher in the majority of US markets. The national average asking rate has moved up in every quarter dating back to 2011. The owner/user market remains seriously out of balance. Demand from users to buy their own facilities is running much higher than supply.

In the office market, following a lackluster first quarter performance, the US office market rebounded in Q2. Vacancy, which was unchanged in Q1 compared to Q4 of 2015, resumed its decline, falling 20 basis points to finish the period at 10.1%. Net absorption more than doubled and average asking rental rates moved up again to extend a more than five year run of quarterly increases. Office markets including New York City, Washington, DC, Chicago and Orange County, CA, all reported net gains in occupied space in Q2 after posting negative net absorption in Q1. That helped bring net absorption nationwide to a healthy 37.5 msf compared to just 15.2 msf in the first quarter.

Average asking lease rates for the US moved up $.12 in Q2 to $23.56 per square foot, which represents .5% increase for the period. Rents are moving up in most office markets around the country, but markets with large TAMI and healthcare sectors tend to see bigger rent gains. The level of new deliveries remained steady in Q2 at just over 19 msf in 313 new buildings. Another 142.6 msf is still being constructed, and 55% of that is concentrated in just 10 of the nationís largest markets.

The US retail property market picked back up in Q2 after a disappointing first quarter. Net absorption more than doubled during the period, the vacancy rate resumed its decline and average asking rents moved up again. Construction activity was little changed.

US retail sales rose by 2.6% in Q2 as compared to the same period last years, nearly doubling the quarterly growth recorded in Q1. Of the 13 major retail categories, 11 posted gains, with non-store retailers leading the pack with 12.7% increase in year-over-year sales gains. Food services and drinking places, saw another bump of 5.4%. Health and personal care store sales rose 8.2% over the same period last year. Quarterly gasoline station sales slipped 9.3% year-over-year, as worldwide surpluses erased price gains earned in Q1. Furniture and home furnishings stores sales grew by 2.1% year-over-year due to improving housing market conditions, while electronics and appliance stores declined by 3.4% for the same period.

The vacancy rate moved lower in Q2, shedding 20 basis points to settle at 5.2%. In the past year, a 40-basis point decline in the vacancy rate has been realized. As reported last quarter, vacancy is sharply higher in secondary locations and nearing 0% in prime submarkets. General retail (freestanding, general purpose properties) posted the lowest vacancy of all retail property types at 3.3%, down 40 basis points in the quarter, followed closely by Power Centers at 4.5%, unchanged in Q2. Shopping Center (neighborhood, community and strip centers combined) rates are still highest at 8.3% despite a 40 basis point decline in the period. Excess supply in this category is concentrated in suburban submarkets that have fallen out of favor with expanding retailers.






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