Interest rates and the economy is the chief concern for the real estate industry in 2018 and 2019, according to the Counselors of Real Estate, which released its annual Top Ten Issues Affecting Real Estate List. As interest rates rise, the commercial and residential real estate markets are already experiencing changes – decreasing demand for commercial property, and higher home mortgage rates. Rate increases also limit value appreciation for commercial real estate and make housing less affordable. Lack of wage growth for all but the wealthiest population segment is dampening housing demand, and limiting consumer spending that the economy needs for growth.
Last mile industrial facilities continue to be a favorite among institutional investors, who like the low vacancy levels and high rental rates these facilities command due to high demand from e-commerce. Everyone seems to be on the hunt for warehouses near large population centers and close to end users, but dense urban markets where land zoned for industrial is in short supply and property values are at a premium. So where is the sector to go next? Up. Multi-story warehouses are already common in Asia, but the concept is now taking off in supply-constrained American cities.
By Amanda Moore, Managing Consultant, Houston
Harris County, Texas has released the vast majority of their 2018 notice values for commercial real estate. They’ve come out especially strong in the industrial sector with warehouse properties seeing a 12% increase over the 2017 certified values and a 6% increase over the 2017 noticed values.
Harris County says Houston is becoming an “industrial hub” due to the rapid growth in e-commerce driving high demand. The county points to flat vacancy rates at 5% and increasing asking rental rates to support their position on the warehouse market. Of the 6.4 million SF of warehouse product under construction, 29.3% is pre-leased. The price at which warehouse product is trading is also increasing - $77 PSF vs. $67 PSF in the prior year. Port of Houston is emerging as a key national distribution region, further fueling the fire for increasing warehouse values with decreasing cap rates YOY.
By Carlos Villatoro, Senior Managing Consultant, Dallas
A prominent national industrial REIT client recently asked for a historical summary of property taxes for a distribution warehouse they were considering purchasing. We were alarmed to see the property had experienced seven consecutive years of significant increases and had already budgeted for another increase in the upcoming year. Unfortunately, this trend is not specific to that one property alone. By 2020, I will not be surprised if we will have seen a decade of continual property tax increases for nearly all industrial properties across the Dallas-Fort Worth (DFW) area. In order to minimize and manage these increases as much as possible, it’s crucial to understand why and how they are happening in the first place.
By Carlos Villatoro, Senior Managing Consultant, Dallas
It is no secret that significant commercial real estate investments continue to pour into the great state of Texas. However, if an owner isn’t lucky enough to receive major tax breaks from local jurisdictions as an incentive to invest here, they will have to accept some of the highest effective property tax rates in the country. The tradeoff is that Texans enjoy a relatively low sales tax rate and zero state income tax rate. Fortunately, the Texas Property Tax Code offers multiple appeal recourse avenues, which allow owners and tenants alike to review the property tax liability from a fair and competitive standpoint.
- Industrial activity will continue to thrive. There is no indication of a slowdown in this sector for 2018, says Peter Muoio, chief economist at Ten-X. During the latter part of 2017, new demand drivers, including e-retail warehouse distribution and fulfillment space, cloud computing and facilities for legalized cannabis, supported much of the demand in the segment. However, Muoio expects there to be an increased demand from traditional users of industrial space, such as industrial production companies.
Many are predicting a leveling out of the commercial real estate market in the coming year. Texas Market Leader James Sutton discussed 2018 commercial real estate trends and the implications of the leveling-out process in the Houston market in this EXCLUSIVE with GlobeSt.com.
GlobeSt.com: What are the commercial real estate trends you are seeing in Houston for 2018?
Sutton: Decrease in overall vacancy for industrial properties, as well as a decrease in overall vacancy, increase in rent growth and zero concessions for multifamily properties. In addition, there will be a reduction in office sublease space as a result of the storm (Harvey). This is a short-term correction as a result of the office sector’s issues stemming from the energy market decline.
Over the past two years, Chicago-area landlords have capitalized on a strong economy and low interest rates by selling properties at a rapid pace. But after a whirlwind couple of years of real estate sales transactions, deal volume in the Chicago area is finally slowing down. Sales of commercial properties year to date through August were down 20 percent from the same period in 2016, to $9.8 billion, according to New York-based research firm Real Capital Analytics. While nearly $10 billion is still far more action than there was coming out of the Great Recession, it's the lowest amount spent on office, industrial, retail, apartment and hotel properties in the market through the first eight months of the year since 2014.
Self-storage is starting to become a victim of its own success. Operators are reeling from a double punch—rising tax rates across many jurisdictions along with higher assessed property values.
The specter of rising assessments is coming just as large and small operators alike are expected to face greater competition from new development and decelerating revenue over the months ahead.
“Taxes have always been a very large expense line item and they are becoming the largest very quickly on almost every property as all of these jurisdictions hustle for more money,” said Kenneth Nitzberg, chairman & CEO of Devon Self Storage Holdings in Emeryville, CA.
Devon operates 46 facilities in 15 states and has seen property taxes rise at its facilities all across the country.
As sales by internet retailers grow and drive demand, U.S. warehouses are becoming more costly and harder to come by. Nationwide, the industrial vacancy rate is 5.3 percent, a 17-year low, according to JOC.com's data hub. E-commerce fulfillment is a big reason why the demand for warehouses and distribution centers has increased of late, Jones Lang LaSalle says, representing about 40 percent of the leasing of industrial properties today.