BY ANDREW LITTLE, Special correspondent – August 27, 2017
Glenn Frey likely was not crooning about the commercial real estate market when he sang “Peaceful Easy Feeling” on the Eagles debut album, but the song’s title accurately describes current market attitudes.
While social unrest and geopolitical rhetoric is peaking, the lack of volatility in commercial real estate markets is unnerving.
Moody’s Investors Service recently published its latest “Red-Yellow-Green Update” for the first quarter of 2017. The report analyzes multiple sources of data to assess commercial real estate conditions in more than 80 markets across the country.
The analysis incorporates existing property inventory, vacancy rates and upcoming supply and demand factors to determine the potential for imbalance over the next 12 months for multifamily, retail, office, industrial and hotel properties in markets Moody’s covers. While the data is imperfect, it provides good predictive value for each subset where adequate information is available.
It is no great surprise that multifamily scored the highest overall in the markets covered. More than 85 percent of the markets received a “green” rating, meaning that demand is outpacing supply and the markets have low or stable vacancy rates.
In contrast, only 17 percent of the markets received a “green” rating for hotel properties.
In somewhat of a surprise, 74 percent of the markets received a “green” rating for retail properties. This comes despite reports about several national and regional retailers closing stores. The sector has endured tremendous pressure from online retailers challenging the traditional brick-and-mortar model.
So, what are the best markets and worst markets? It varies by property type.
Stay away from investments in hotels in New York; in office space in the central business district of Nashville; in suburban office buildings in San Jose, Calif.; and industrial properties in Trenton, N.J. All received a composite score of “0” and ranked “red” in the Moody’s report.
On the positive side, if you could invest in apartments in Long Island, N.Y., Newark, N.J., San Jose, Calif., San Diego and Oakland, Calif., you should. You also may look for industrial properties in Honolulu, the highest scoring subset with a “green” rating and a score of 95.
While Richmond was not ranked in all property types, it received a strong “green” rating in two areas: apartment and hotel properties.
The only other property type where enough data was available in Richmond was retail properties and Moody’s advises caution with a “yellow” rating. The cautious rating makes sense given the uncertainty locally with the increasing competition among supermarket operators.
Although not enough data was available for Richmond industrial properties, it is safe to say the sector is red hot.
Vacancies are very low in the flex and warehouse markets and rental rates are moving higher, according to data from commercial real estate brokerage CBRE. Leasing and net absorption was exceptionally strong in the second quarter with 851,061 square feet absorbed, according to the report.
The warehouse sector has not gone unnoticed as Panattoni Development Co., a large national industrial property developer, announced in early August that it had acquired 62 acres near the Richmond Marine Terminal to build a nearly 1 million-square-foot distribution center. The company acquired the land from Philip Morris USA off Commerce Road along Interstate 95 near the Richmond Marine Terminal.
John B. Levy & Co. partner and investment banker Andrew Little can be reached at email@example.com.