Midterm Results Don’t Dampen CRE Demand

HOUSTON—A US Congress divided in the wake of the 2018 midterm elections is less likely to hinder continued economic growth or dampen demand for commercial real estate, Transwestern contends in its latest outlook. Two years of anticipated gridlock ease fears that political or economic policy changes will derail business expansion plans, setting the stage for further job creation and modest gross domestic product growth of about 2% in 2019. This growth will be boosted by consumer spending, according to the report.

As for jobs, construction, manufacturing, transportation and warehousing employment growth are trending up. Retail sales have softened but consumer confidence remains high.

There was positive net absorption during the third quarter in the 35 markets tracked by Transwestern, as well as a positive 12-month net absorption in 44 of the 47 markets studied. Preleased deliveries are driving a large percentage of absorption and the vacancy rate dropped by 300 basis points during the past five years. Moreover, there is year-over-year rent growth in 43 markets, with smaller coastal markets reporting tremendous rent growth.

Finally, expected online holiday shopping growth bodes well for the market.

“With surging corporate profits spurring continued job growth, we’re seeing healthy demand for nearly all types of commercial property,” said Elizabeth Norton, managing research director, Mid-Atlantic region. “Strong fundamentals point to attractive returns from real estate investments compared to stocks and bonds, as well as ongoing demand for both debt and equity.”

Most notably, the US industrial market remains red-hot with record-high port volumes continuing to drive coastal markets as tariffs loom, positive absorption and a vacancy rate that remained below 5% in the third quarter, despite the addition of new inventory. Prelease commitments in the sector are offsetting a large percentage of the 376 million square feet of new construction.

While not as stellar as the industrial sector, the office market is enjoying stable vacancy and modest asking rent appreciation nationally. October’s 3.7% jobless rate signaled full employment by historical standards, but Transwestern expects recent retirees and others not counted as unemployed to re-enter the workforce in the coming year. Still, with dim prospects for increased immigration, a labor shortage could begin challenging economic growth by early 2020.

The Houston market is also mirroring national trends in many respects, says Stuart Showers, director of research for the Houston Transwestern office.

“Houston’s industrial sector remains in tight alignment with national trends, as direct vacancy of 5%, compared to the national rate of 4.9%, remains below frictional vacancy levels, resulting in continued demand for new supply,” Showers tells GlobeSt.com. “As such, several speculative developments are underway to capture the unmet demand.”