Emerging Trends in Real Estate® 2021 reflects the views of individuals who completed surveys or were interviewed as a part of the research process for this report. The views expressed herein, including all comments appearing in quotes, are obtained exclusively from these surveys and interviews and do not express the opinions of either PwC or ULI. Interviewees and survey participants represent a wide range of industry experts, including investors, fund managers, developers, property companies, lenders, brokers, advisers, and consultants. ULI and PwC researchers personally interviewed 1,350 individuals, and survey responses were received from more than 1,600 individuals.
Just under 13.6 million square feet (msf) of outdoor retail shopping center space was returned to market in Q3 2020 as the vacancy rate among community/neighborhood, power, lifestyle and unanchored strip centers collectively rose from 6.8% to 7.1% in the 65 retail markets tracked by Cushman & Wakefield.
Office-using employment, the key economic driver of space demand, plunged by more than 2.8 million jobs, or 8.6% in March and April. Since April, the economy has gained back roughly a million of those jobs, but that still leaves office-using employment roughly 1.8 million jobs below its February peak. This decline in employment has led to a sharp fall in occupancy, leading to substantial negative absorption. In the third quarter, net absorption was -41.3 million square feet (msf), by far the largest decline in occupancy in any quarter since we started collecting data in 1995. Absorption was also negative at -23.0 msf in the second quarter.
Even as the pandemic has continued, the Idaho market has not seen many closures. The vacancy rates seem to reflect more of the big box users that were already on the way out before the pandemic. There has not been an influx in smaller spaces in the 1,200 to 5,000 sf range coming available which seems to be creating even more demand as product remains slim. We are seeing some mid box users such as Big 5 having record sales and renewing their leases. With the population continuing to grow the housing and multifamily sectors are exploding directly reflected in the strength of home improvement retailers. We are seeing home improvement, furniture, flooring, and landscape doing well, and in some cases expanding.
SUBLEASE MARKET: Tenant Demand
The third quarter saw a dramatic increase in the number of properties and square footage on the market for sublease. We expect these numbers to continue to rise in the fourth quarter as many companies have declared January 1, 2021 as a ‘return to office’ targeted date. In addition, a number of companies appear to have embraced the concept of moving their workforces to home offices. These factors also attributed to reduced leasing activity and tenant demand in the quarter. However, we expect to see tenants who are seeking space benefiting from the sublease market and the terms that may be achieved in such a market.
The Idaho industrial market continues to show strength into the third quarter. Vacancy remains steady at 3.4% up just 7 basis points (bps) from Q2, and up from pre-COVID Q1’s 3.0%. Q3 vacancy remains approximately 2.0% below the national average of 5.3% and is forecast to be even wider in Q4, as national vacancy is expected to rise to 5.6%-5.8%. The lack of supply within the market is a result of growing demand from our robust owner/user market and furthered by the addition of new companies and corporations relocating or adding additional locations in Idaho. Amazon is set to occupy their 2.6 million square foot (msf) build-to-suit in Nampa, ID in Q4 and is an example of Idaho’s growth in population and large corporations arriving to service our communities.
Industrial Market Remains in Growth Mode Despite Pandemic Demand:
Despite the global pandemic causing economic turbulence, the U.S. industrial market, with the continued support of tailwinds like e-commerce, has managed to accelerate through the first three quarters of 2020. The market finished the third quarter at a strong pace, absorbing 62.1 million square feet (msf), the strongest quarter so far this year. This brought the year-to-date (YTD) total to 159 msf of absorption, nearly equaling the 160 msf reported for the first three quarters of 2019. With net occupancy growth down only slightly year-over-year (YOY), absorption levels remained positive heading into the final quarter of 2020.
The U.S. outdoor shopping center market recorded -7.7 million square feet (msf) of net absorption in Q2 2020, bringing the mid-year total to -12.2 msf. Although this reflects the largest giveback of space since 2009, the impact on vacancy and rents has thus far been moderate. Overall vacancy climbed 20 basis points in the quarter to 6.8% with overall asking rents for all classes of space unchanged from the prior quarter at $17.58 per square foot.
With the continued support of tailwinds like eCommerce, the market managed to keep solid footing through the first half of 2020. The U.S. industrial market finished the first half of 2020 at a moderately strong pace, absorbing 43.9 million square feet (msf) in the second quarter bringing the mid-year total to 89.8 msf of absorption. Net occupancy growth in the first half of the year is down year-over-year but absorption levels remained positive and will remain so heading into the second half of 2020. Despite the slow start to the year and increased concern around COVID-19 impacts, demand for industrial space won out.