New Construction Has Been 'Underwhelming'

New construction across all CRE sectors was “underwhelming” in the fourth quarter, underscoring the pressures the industry is feeling from widespread labor and materials shortages and uncertainty surrounding the COVID-19 pandemic.  

Thomas LaSalvia of Moody’s Analytics REIS says “2021 will likely be remembered as a trough for near-term supply growth,” and points to data suggesting that multifamily and office completions will finish down 30 to 40% of recent averages, while retail will show declines closer to 80%. 

“The minimal new inventory continues to help prop up both rents and occupancies across all three sectors,” LaSalvia writes in a new analysis, referring to multifamily, office, and retail. “Multifamily demand rebounded in a considerable way during the second half of the year, and with only about 150,000 new units brought to market in 2021, rent increased with unprecedented ferocity. While both office and retail performance remained relatively flat during the year, this is nearly as impressive given the negative demand pressures on the two sectors. In these circumstances, the lack of supply helped to stabilize space market performance.”

The fourth quarter bump many experts expected in multifamily starts never came to pass, LaSalvia says, and that lack of new deliveries combined with robust demand to post 3% rent growth in Q4. He expects a “large increase” in new inventory this year and next, and says that new supply will help stabilize the market. Boston and Nashville led US metros for a pipeline of new activity, and Boston had the highest rent growth at 6.3%.

The numbers come amidst emerging data showing that multifamily renters (and builders) are increasingly looking to the suburbs and medium-sized cities as the pandemic wears on.

Meanwhile, office completions for the quarter clocked in just under 5 million square feet; by contrast, the pre-pandemic average was around double that.

“Delays in completions or decisions to even build continue in this sector as the work-from-home situation evolves,” LaSalvia says. “We expect this will continue to take its toll on completions for years to come, but even now there does seem to be an effect.”

He also noted “emerging discussions and action” on the conversion of 1980s and 1990s office parks into multifamily units. 

“While renovations are costly, this does have the potential to both help property owners of troubled assets, as well as decrease the vacancy rate in the office sector, potentially placing less downward pressure on rents,” he said. 

Office completions were spread throughout the country in the fourth quarter, with Charlotte standing out with a 4% increase in year-over-year completions. The city’s vacancy rate is also up 330 basis points over the most recent four quarters.

“Interestingly, rent has increased a very solid 3.5% during this same time span,” LaSalvia notes. “This illustrates a growing phenomenon in that high-quality space is being leased at or even slightly above pre-pandemic levels, whereas less desirable assets are finding it harder and harder to find tenants.”

Retail completions lagged below recent quarterly averages: according to Moody’s data, only 5.2 million square feet of new retail space has been added in the past seven quarters.

“The evolution of the sector, mostly due to the rise of e-commerce, but also in response to shifting populations, has certainly caused developer hesitation, a phenomenon which is unlikely to change soon,” LaSalvia said. “This lack of new supply, along with robust consumer spending has helped performance metrics remain steady for existing properties.”