Commercial real estate services company Lee & Associates recently released its 2022 first-quarter North America market report, highlighting industrial, office, retail and multifamily segment outlooks.
The class-by-class review of commercial real estate for the first quarter of the year focuses on how real estate is adjusting post-COVID by observing the major commercial real estate sectors in various cities across the continent.
Industrial Results
According to an overview of the industrial segment, rents pushed on strong demand in the first quarter of 2022 as vacancies fell to record lows, dropping 4.1%. As a result, rent growth hit double digits, rising 10.1% in the United States.
First quarter net absorption in the U.S. totaled 92.8 million square feet, which was up 25% year-over-year, but down 35% from the 143 million square feet average of the last three quarters of 2021.
Lee & Associates report that the first quarter results were partially a result of a pause in new construction starts early in the pandemic. After developers saw consumer goods orders begin to skyrocket, many started to make up for the lost time.
There are currently 816 million square feet of new space underway in the U.S. with about 605 million square feet landing on the market in the next four quarters—a sharp increase from the total 342 million square feet in completions since last year’s second quarter.
The report also noted that leasing volume is 65% above the quarterly average over three years prior to the pandemic. Leasing levels have also plateaued at around 345 million largely because of the short supply of quality space still available. Both findings are believed to be contributing to brick-and-mortar, online merchants and logistics providers lashing down any available space to accommodate current requirements and expansion plans.
“Nevertheless, the industrial sector is in a unique position of seeing record leasing at a time when investors are questioning the long-term outlook for office and retail, seen as more vulnerable to changing workplace strategies and consumer spending due to COVID-19,” the report said. “As a result, industrial property is attracting investment dollars otherwise directed toward other commercial property types and has driven cap rates in an increasing number of markets to below 4%.”
Office Results
While this segment revealed modest growth and potential recovery in the last two quarters, in the U.S. the market reportedly slipped the first quarter of 2022, revealing an increase in the national vacancy rate to 12.3%. According to the report, the U.S. office vacancy rate is the highest it’s been since 2011.
Tenants shed 468,602 square feet in Q1 following net absorption gains of nearly 27 million square feet in the second half of 2021, which ended the year with 42.4 million square feet in the red. While leasing activity has improved, the report indicates that numbers are still below the quarterly average of about 115 million square feet before the lockdown.
“Gains will have to wait until positive net absorption returns along with reductions of sublease space, which totals nearly 200 million square feet,” the report reads. “Although the supply pipeline has slowed somewhat, there still is plenty of spec product under construction with 40% of the 142-million-square-foot pipeline listed as unleased.”
In Canada, it was reported that net absorption was negative 863,133 square feet and that numbers were in the red for 3.1 million square feet in 2021. The nationwide vacancy rate remains in the single digits, however. Roughly 80% of new construction in Toronto and Vancouver are slated to add 4.7% and 8.3%, respectively, to inventories in each market.
“With COVID-19 vaccines readily available and serious infection rates mercifully reduced, corporate America appears determined to adhere to ‘return to office’ plans,” the report stated. “Most return mandates were set to fully take effect in the second quarter, which is being met in some cities with indoor mask measures against BA.2, the emerging subvariant of Omicron.
“One of the first reported workplace COVID-19 studies was completed recently in Houston, where 85% of businesses have brought employees back to their desks. Under hybrid work arrangements employees are at the office less often, 10.7 days a month compared to 17 days a month before the pandemic, according to the survey by Central Houston, Inc., an association of downtown landlords, businesses and residents.”
Retail Results
For the first quarter of 2022, the North American retail market continued to show strong growth. According to the report, there were 23.4 million square feet of net absorption in the first quarter of the 11.8-billion-square foot U.S. market.
A fivefold jump from the same quarter last year and slightly up from the previous three quarters in 2021, the report went on to note that foot traffic for retail has returned to pre-pandemic levels and that U.S. store openings outpaced closures for the first time since 2014.
The national average vacancy rate is 4.5% with tenants expanding in all five retail categories. This was led by 9.3 million square feet of growth in neighborhood centers, which total 3 billion square feet of inventory.
“Neighborhood retail leasing activity was dominated by discounters, grocers, gyms and off-price apparel,” the report stated. “The largest category, general retail with 6.3 billion square feet, reported 7.6 million square feet of net absorption in the first quarter of 2022.”
It is believed that growth in the segment is being driven by increased demand for smaller spaces, which fell last year to a historically low average of 3,000 square feet. In addition, U.S. developers and national merchants are also shifting focus to markets in the West and South instead of urban markets in the Midwest and Northeast where retail has underperformed as compared to the national average.
Multifamily Results
In the multifamily segment, the report revealed that rents and values soared in the first quarter of 2022 while demand eased. The latest numbers follow several successive quarters of healthy and unprecedented demand for apartments, which have skyrocketed with the national average sale price hitting $244,343 per unit in the first quarter, an 18.4% year-over-year increase.
Despite the positive numbers, tenant growth in the first quarter did slow with the onset of the Omicron variant of COVID-19. In 2021 tenant growth totaled 697,963 apartments, an 83% jump over the previous record of 381,288 units in 2020. Average effective rents in the first quarter were $1,572, up 13.7% year-over-year and 16.4% since the start of lockdowns.
“Meanwhile, multifamily developers and landlords following migration patterns of workers during the pandemic are betting heavily on apartments across the South and Southwest where warm weather and business-friendly governments have attracted workers and employers from California and the Northeast,” the report stated.
First quarter net absorption totaled 54,170 units, down 39% year-over-year. In Canada, net absorption totaled 10,276 units, reducing the vacancy rate to 2%. The average price per unit of 137 properties traded in Q1 was $236,257.
New construction underway for this segment totals 748,187 square feet, a 32% increase over Q1 last year.
“With rent growth surging, investment capital has poured into the multifamily sector,” noted the report. “Apartment sales totaled $288 billion in 2021, topping all commercial property types and double the total from 2020. Atlanta, Houston, Dallas-Fort Worth and Phoenix lead all markets in sales volume.”
For more information on individual segments or to view the full report, click here.
