NASHVILLE, Tennessee—Hotels comprise just one piece of the pie in the investment landscape.
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Understanding the trends that are happening in other commercial real estate sectors is helpful for hotel owners and investors, said Jamie Lane, senior managing economist, CBRE Hotels Americas Research and Econometric Advisors.
During a Data Dash presentation at the Hotel Data Conference titled “U.S. real estate market outlook,” Lane examined the retail and industrial, apartment and office sectors across 60 cities.
Lane said the real estate cycle pretty much follows the same theory as the hotel cycle and has many of the same economic drivers, whether its gross domestic product or employment. As labor declines, there’s generally a decline in occupancy and development pace, he said.
“We saw that throughout all property types in 2010 and 2011,” he said. “Most property types really did recover strongly in 2012 through 2015, and then we’ve seen across some of the property types peaking in recent years, and we expect a slowing for all property types going forward as employment growth starts to tick down, and potentially goes negative over the next few years.”
Vacancy levels, occupancy change
In terms of vacancy or occupancy change, Lane said he’s seen cyclicality in all property types, and almost some counter cyclicality in the apartment sector where there was a shift in 2010 and 2011. More people are beginning to own apartments instead of single-family homes, he said.
“That’s really held throughout this cycle, unlike past cycles where we saw a strong increase in home ownership rates,” he said.
Hotel occupancy change can be a lot more cyclical with the short term-leases, he said. An average office lease will be 10 or 12 years, “and you can imagine what that would mean for hotels if you could sign a 10-year lease,” he said.
As of Q2 2019, CBRE data shows hotels have 30% vacancy levels. Average multifamily vacancy levels come out to be 4%. Lane said multifamily, industrial and office sectors are at roughly 20-year lows for vacancy levels.
“The headlines STR keeps putting out of record occupancies for hotels is true for pretty much multifamily, office and industrial,” he said.
While retail vacancy levels is relatively low, given the hardships it’s had as a property type, it’s not as low as it has gotten between 2006 and 2007, he said.
“One of the interesting things to look at is how volatile the different property types are relative to each other,” he said.
Industrial and retail
Amazon in particular is a company that has been affecting both industrial and retail sectors, Lane said. Currently e-commerce sales account for about 10% of total retail sales in the U.S., and they’re growing quickly. This aligns with the decline in retail rent growth, which Lane described as being “anemic.”
In-store sales percentages are still positive, and about 90% of retail sales still occur in stores, he said. An estimated 50% of e-commerce sales are actually going to brick-and-mortar stores.
“What’s interesting is there’s a blending,” he said, where brick-and-mortar stores such as Gap have a good percentage of their sales also coming from e-commerce.
In terms of specific retail sales by category, Lane said food-and-beverage places are still “powering strong” this quarter and the past year. Large malls and department stores, however, are not.
The rise in e-commerce logistics companies is driving the new demand for industrial tenants, he said.
As many as 60% of new industrial tenants are related to e-commerce and logistics companies. While e-commerce is causing the decline in retail, it’s the major source of demand for industrial, he said.
Industrial rent growth is growing at about 4% per year and is expected to continue, but retail growth is only growing at 2% per year. As it compounds over time, it’s expected that by 2021 there could be a 21% difference in the index rent levels for the two property types, he said.
However, there are still concerns over global trade tensions and how that could affect industrial buildings. And while the strength of the U.S. dollar could negatively affect other sectors, it’s a good thing for industrial as it makes imports cheaper.
Apartments (multifamily)
The big story across the apartment sector is how much new supply is popping up—especially in the luxury segment, Lane said.
“We are seeing so much more supply than we’ve seen in past cycles, and we expect that to continue,” he said.
The amount of completed multifamily construction has peaked, but it’s expected that will sustain for at least the next two years, he said. In terms of rent growth and vacancy levels, that means rent growth will slow substantially as vacancy starts to increase and supply outpaces demand.
But it is a story of two different sectors within the multifamily sector, Lane said.
Traditional “garden” apartments, which are typically found in suburban locations, are still doing relatively well because there’s not a lot of new construction in that segment, but high-rises is where rent compression is happening.
“And you see that among the classes, as well, where Class A is essentially flat to plus-1% and Class C is still growing 4.5% to 5% in terms of growth rate,” he said. “You see really strong investment now moving into workforce housing and Class C where there’s still a lot of demand for that.”
In general, he said, apartments have really strong demand. Almost all new-build buildings are renting out pretty quickly and are expected to sustain high levels of delivery through at least 2020, he said.
Offices
Lane said the office sector is one of the most interesting to look at because of one major disruptor that’s closest to a major hospitality disruptor—technology.
High-tech jobs such as Google and Amazon are moving a lot of their workforce outside of San Francisco to other high-rent-growth markets across the country, and that is driving a ton of new absorption in the office space, he said. These high-tech companies are willing to pay premium rents in order to be in top locations, he said.
Another disruptor Lane highlighted was flex space providers such as WeWork. He said CBRE believes there will be a rise in the amount of providers, which will propel this sector further. As of 2018, there was 5.4% of new flexible leasing space versus 8.6% traditional business services.
“Flex space as a disruptor is 2% of total supply where Airbnb in the hotel industry is about 8%,” he said. “They still have a long way to go to be a real disruptor in the space, but we think by 2030 flex space could take up as much as anywhere from 10% to 20% of total supply.”
The interesting point to note is flex space is just one part of an overall building and not taking over the overall supply, he said. This model is how office buildings are going to evolve to in the future with both new-builds and existing buildings, he said.
Lane said he sees an opportunity for hotels to take part in this model.
“You see it popping up already with hotel companies (and) with short-term rental companies taking over anywhere from 10 to 15 floors within (an) existing office place and converting it into multifamily, short-term rental or hotel use,” he said.