Lee & Associates 2021 Q4 North America Market Report

INDUSTRIAL OVERVIEW: DEMAND FOR LOGISTICS SPACE SOARS

Fueled by an unprecedented boom in household spending during the pandemic, demand for warehouse-and-distribution space soared 147% in 2021, driving down the vacancy rate to a record 4.3%.  Net absorption totaled 503.4 million SF in 2021 compared to 203.7 million SF for 2020. Fourth quarter 2021 demand totaled 136.9 million SF, down from 157.9 million SF in Q3 but up 38% from the 99.2 million SF of net absorption for the same period a year earlier. Year-over-year rent growth is at a record high, averaging 8% and more among logistics properties.

It’s difficult to imagine a more favorable economic background to support spending on consumer goods. Americans have been flush with cash from three rounds of stimulus checks plus the increased savings they’ve accrued while social distancing. The Commerce Department reports that the real annualized pace of household spending averaged $166 billion from 2015-19 but has surged by $840 billion since the beginning of 2020.

After a widespread pause in new construction early in the pandemic, developers have been breaking ground at a record pace in most markets and are racing to keep up with demand.  More than 685 million SF of industrial space is under construction, up 48% from early 2020.  Trailing 12-month leasing is up from 40% to 80% compared to pre-pandemic levels in many of the largest markets, including Chicago, Los Angeles, Dallas-Fort Worth, Atlanta and Philadelphia. READ MORE >

OFFICE OVERVIEW: DEMAND IMPROVES IN THE FOURTH QUARTER

Tenant demand continued for the second straight quarter to close out 2021, as employers grew increasingly confident that vaccines and safety protocols have dramatically reduced the risk of reopening the workplace. 

There were 15.1 million SF of net absorption in Q4, which reduced the negative total for the year to 39.8 million SF.  In 2020, office net absorption was 74.5 million SF in the red.  But the glut of vacant direct and sublet space, virtually frozen rents, leasing volume below pre-pandemic levels, new space emerging from the pipeline and widespread hybrid work setups all combine to make the timing of a full office recovery difficult to predict.  

The volume of new space coming out of the national pipeline has slowed since the first half of 2021, but there still is plenty of spec product underway. About 144 million SF are under construction – about 60% of which is pre-leased – compared to 160 million SF underway prior to the lockdown. Unsurprisingly, groundbreakings are off about 35% since Covid hit, averaging 13 million SF per quarter. 

Markets with the most new construction on a percentage basis include tech centers San Jose, Austin and Seattle. Other construction leaders include life sciences hub Boston and Sun Belt metros such as Miami, Nashville and Charlotte, where demand exceeds the national average. Construction activity has cooled in New York City, Washington, D.C., and San Francisco, but the perennial leading metros still have plenty of new supply underway.

The volume of sublet space remains near 200 million SF, a record high. Second-hand space accounted for 12% of leasing activity in Q3, well above the pre-pandemic average of 8%. READ MORE >

RETAIL OVERVIEW: DEMAND RETURNS TO PRE-COVID LEVEL

Tenant demand returned to pre-pandemic levels in 2021 with net absorption totaling 75.2 million SF – the best full-year performance since 2017 – as the combination of massive government subsidies to consumers during the health crisis along with robust wage growth pushed brick-and-mortar retail sales to record levels.  Growing vaccination rates enabled retail operations to normalize, and pre-pandemic levels of foot traffic have returned to many open-air and lifestyle centers. Many national retailers are reporting improved same-store sales. Several major merchants, including discounters Dollar General, Dollar Tree, Five Below, and home goods sellers TJX Companies and Burlington, have announced plans for significant expansion of store counts. Additionally, the number of merchants seeking bankruptcy protection has fallen to a five-year low.  Openings outpaced closures for the first time since 2016.

Grocers, discounters and off-price apparel stores dominate recent leasing activity. Fitness tenants were making a strong comeback as gym popularity was rebounding before being threatened by the Covid-19 omicron variant. The new but milder flu variant hit just as foot traffic and leasing was beginning to recover from the deep losses caused by the pandemic.

The reorientation of retailer locations and footprints toward more efficient models continues to reveal bifurcations in performance based on geography, box size and shopping center type. Geographically, merchants continue to focus expansion plans on the faster growing metros with stronger buying power in the South and West. Conversely, some struggling metros in the Midwest and Northeast are showing no growth. READ MORE >

MULTIFAMILY OVERVIEW: 2021 DEMAND SMASHES RECORDS

Vaccine distribution, easing pandemic restrictions, improved job opportunities and a reversal of suburban migration with young people moving out on their own combined to produce a historic surge in apartment demand and rent increases in 2021.

A record 717,590 apartments were absorbed in 2021. That is a 91% increase over the prior annual record of 376,069 units set in 2020 and a 120% increase over yearly average tenant growth since 2016. After a slowing economy in the third quarter blamed on the spread of the Delta variant, the fourth quarter was rebounding until the Omicron variant hit. There were 95,910 units absorbed in the fourth quarter and 299,854 units absorbed in the second half.

Rent growth nationally rose 11% over the past year. Indexed rents are up equally in urban and suburban markets, a welcome turnaround for the downtown assets hard hit during the pandemic.  The Sun Belt is driving the rent gains with nine of 10 markets reporting annual rent growth of more than 20%.  Southern California’s fundamentals are strong with Orange County posting 17% rent growth. Rents in the three Bay Area metros had been off 11.5% but grew 6.1% growth in 2021.  New York City rents were up an average 4.2% in 2021 after falling slightly in 2020.

The strong demand and rent growth has not been met with the typical increase in new product, so far. The 377,605 units delivered in 2021 were down 12% from 2020. During the first three quarters of 2021, multifamily starts fell by 18% compared to 2020.

According to a recent developer survey by the National Multi-Housing Council, further delays in starting and completing new multifamily projects can be expected from challenges in the approval process and supply-chain disruptions. READ MORE >

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2021 Q4 North America Market Report

 

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