2019 Midyear Economic & Real Estate Report
Office: Although weaker employment growth is expected to weigh on demand, fundamentals are projected to remain favorable due in part to the strong national economy. Elevated construction levels are expected to drive up vacancies and limit rental growth in select metropolitan markets. Suburban and secondary locations, where pricing has not appreciated as quickly as in CBD locations and construction has been more modest, will continue to generate greater interest from investors and tenants, resulting in higher rental growth.
Apartment: Favorable demographics are expected to drive demand in the foreseeable future as increasing millennial household formations resulting from a strong labor market and more empty-nester baby boomers downsize from owned-homes into amenity-filled rentals. Healthy levels of development will attempt to satisfy pent-up demand as rising home prices keep potential buyers in rental housing.
Retail: Despite healthy consumer spending, large numbers of brick and mortar retail closures will continue to alter the retail landscape by creating more mall and shopping center vacancies. In the face of mounting pressure to fill these vacancies, new tenants are expected to pressure landlords for more flexible lease terms and concessions. With e-commerce continuing to capture a larger percentage of retail sales, developers, hesitant to build new product, will increasingly reposition and transform older vacant retail assets into new, consumer-driven venues and mixed-use projects featuring more food, entertainment and nontraditional tenants.
Industrial: As e-commerce sales surge, strong demand for modern distribution space/fulfillment centers will prompt supply-chain modernization, with a greater emphasis on regional distribution to ship product to consumers in the fastest and most efficient way. The construction pipeline is projected to remain robust, but as more speculative supply enters the market, vacancy rates will also increase in select metropolitan markets and rental rate appreciation will slow modestly. Ongoing trade disputes and uncertainty created by tariff disputes with China that may impact supply-chain operations need to be closely watched.
Hotel: There is cautious optimism regarding upcoming lodging performance. While steady leisure and business travel is projected to boost growth of RevPAR and ADR, escalating labor costs and the growth of home-sharing companies (with lower overhead costs and less regulation) will continue to challenge leading hotel brands. Additionally, heightened levels of construction activity are projected to challenge occupancy growth and moderate RevPAR growth in the upcoming quarters.
Senior Managing Director