Retail Becomes Top Performing Asset Class

The retail market is the property division that is generally delivering the strongest results among the four leading asset types, according to In Marcus & Millichap’s look at first-quarter fundamentals data.

Multi-tenant retail space absorption in the first quarter totaled 1.4 million square feet, which is about half of the new construction total for the quarter.

Absorption was positive in more than half of the major markets nationwide, led by Houston, Dallas-Fort Worth, New York, Cincinnati, and Kansas City.

Generally speaking, the broader commercial real estate market is treading water, according to John Chang, Senior Vice President, National Director Research and Advisory Services on his firm’s recent analysis video.

“Higher interest rates and slackening economic growth have taken a toll on commercial real estate space demand,” Chang said. “But the good news is that the metrics are generally neutral, not a really big movement for any property type in either positive or the negative direction.”

Chang said that although much will depend on the combination of interest rates, economic momentum, and consumer sentiment, “we must remember that the Federal Reserve has purposely tried to slow the economy and their efforts appear to be working.

“But if they can secure a soft landing, then commercial real estate should be able to shift out of its generally neutral stance and begin to gain forward momentum.

The timing of the gains is still in question, but from a long-term perspective, the outlook remains positive.

Reviewing the other asset classes, multifamily had a 10-basis point increase in the national vacancy rate compared to the fourth quarter, but that vacancy rate increase was driven by new unit completions.

Nationally, nearly 104,000 additional apartment units were filled in the first quarter on net, however, that fell short of the more than 135,000 new units completed.

Apartment absorption was led by Dallas-Fort Worth, Phoenix, Austin, New York, and Atlanta.

When measured as a percentage of inventory, the leaders were Austin, Salt Lake City, Charlotte, Nashville, and Jacksonville.

The only three major markets that had negative net absorption in the first quarter were in Southern California. That included Orange County, Los Angeles, and San Diego. In all three cases, the net loss was about 0.1%, so it was negligible.

In summary, Chang said it appears that multifamily housing demand is making a fairly strong recovery, but new supply will continue to weigh on performance through 2024.

The construction pipeline is thinning, and therefore the number of multifamily starts to begin to decline.

“That offers the prospect of improving fundamentals over the course of the next few years,” according to Chang.

For office properties, Chang said there was hope that a little bit more momentum carry over into the first quarter of this year, following on the heels of positive net absorption of about 20 million square feet of office space in the fourth quarter of last year. However, the first quarter result was negative 10.7 million square feet.

Nonetheless, 17 major metros had positive space absorption in the first quarter, led by San Jose, Charlotte, Northern New Jersey, Seattle-Tacoma, and Detroit.

But the major urban hubs of Los Angeles and Chicago each had negative absorption of about 2.5 million square feet last quarter. Those two markets alone constitute about half of the net negative space absorption in the quarter.

For industrial, space demand was also negative in the first quarter with about 7.5 million square feet of negative net absorption. Coupled with the completion of about 82 million square feet in the first quarter, the vacancy rate increased by 50 basis points to 5.8%.

Industrial space demand was strongest in Chicago, Austin, Denver, Atlanta, and Philadelphia and 15 major metros had positive industrial space demand.

Although long-term space demand drivers support the outlook for industrial properties, the negative absorption in the first quarter broke the 55-quarter streak of space gains.

“While that may be a bit disconcerting, we must remember that a single data point does not form a trend,” Chang said.