Still Waiting for CRE Construction to Rebound

Commercial real estate construction hasn’t had a rebound in the first three quarters of this year despite upticks in other sectors of the economy, said a new report from Moody’s Analytics.

“Completions are off from their recent averages a little over 20% in the multifamily and office markets, and closer to 80% in retail,” Moody’s said it has found.

For the fourth quarter, the expectation is there could be a bump on the way for multifamily, while retail and office activity are likely to remain subdued both in the near- and longer-term.

The research service cites as reasons for the lackluster performance pressure from labor and material shortages, rising wages, and some newly formed uncertainty regarding forecasted economic growth.

During the third quarter, effective rent increased for the second straight quarter in the apartment and retail sectors, while the office sector showed its first bump in effective rent since the first quarter of 2020.

The vacancy rate declined for all three property types.

Apartment rents and vacancies have been helped, said Moody’s, by a slightly limited new supply.

“In particular rent growth in the third quarter registered greater than 7%, a historically significant result and one that has more to do with strong absorption, inflationary pressures, and an overheating single-family market than with slow inventory growth,” the report pointed out.

With more apartments being delivered to the marketplace during the rest of 2021, the feeling of the Moody’s researchers is that rent growth will slow with absorption staying strong.

Office completions for the second quarter came in at just 2.9 million square feet, well below its recent quarterly average of approximately 10 million.

Moody’s said the low supply growth has helped to maintain some stability in office sector performance metrics as effective rents increased 0.1% during the quarter.

In retail, completions continue to lag well below their recent quarterly averages.

The growth of e-commerce was seen as a major factor in developer hesitation, a hesitancy Moody’s doubts will diminish soon.

In the third quarter asking rent increased 0.1%, while effective rents increased 0.3%, as concessions pulled back a bit. The vacancy rate declined 10 basis points for the second quarter in a row, according to Moody’s.

Last month, the firm said multifamily asking and effective rents hit historic highs in the third quarter, while the office sector showed signs that it may finally have hit rock bottom. 

Asking and effective rents for multifamily properties nationally registered respective increases of 7.5% and 7.9%, the highest quarterly growth Moody’s Analytics REIS has tracked since the firm started publishing quarterly data in 1999. The increases are also triple the prior record from Q3 2000. Net absorption in the third quarter also exceeded Q1 and Q2 combined, and vacancy for the top 79 metros REIS tracks was down by 60 basis points to 4.7%.

Office vacancy actually trended downwards to 18.2% in Q3, down from 18.5% in the prior quarter.