AMERICAS WATCH FEBRUARY 2019

The U.S. economy is holding up well, but growth moderated going into 2019, and sore spots have emerged in housing and manufacturing. The labor market remains strong, but a low unemployment rate and a pickup in wage growth indicate that future gains are likely to be constrained. So far, the trade war has not been disruptive to the broader economy, but it is still early days. Inflation remains subdued as energy prices cooled in recent months providing more support for consumer purchasing power. However, consumer and business sentiment have been buffeted by equity market turmoil over the last few months and, more recently, the political grandstanding over the government shutdown. CRE performance ended the year on a positive note. Occupancies and rents for all the sectors showed meaningful improvement through the year as tenants expanded. Investor interest for CRE in 2018 reversed the declines in recent years despite volatile and generally rising interest rates. Asset selection was the dominant theme as the year closed with investors focused on buying assets closely aligned with enduring investment themes.

OFFICE SECTOR BUILDS MOMENTUMThe national office sector continues moving to balanced conditions. Healthy leasing activity, positive rent growth and a growing emphasis on flexibility driven by tenants’ evolving needs has kept the momentum going. Broad-based macroeconomic growh are supporting continued improvement in market fundamentals. Although business sentiment has taken a hit following a particularly volatile fourth quarter for equities, it is yet to show up in leasing activity. The vacancy rate declined by 40 basis points in 2018 to 12.6%, 20 bps lower than its prior cyclical trough in mid-2007. Strong net absorption levels of over 58 million sf – the second best showing in the last nine-years – significantly outpaced new supply. At the same time, newly delivered space is giving tenants increased flexibility and leverage as landlords of older product scramble to make improvements to keep their buildings relevant.

Source: CBRE EA

*WTI Crude Oil Spot Price Data points through end of January 2019.

Change represents month-over-month change.

OFFICEPRINCIPAL CONTRIBUTOR:

Shubhra Jha

19:001-2

2,704.1S&P 500

2.25-2.50%Fed Funds Rate

2.63%10-yr. T-Note

$53.79Oil*

6 bps

7.9%

18.5%

11%

12%

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17%

-5

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SF m

illio

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Absorption (L) Vacancy Rate (R)

This information is for our clients and investors only. Please note that the content of this report is for informational purposes only and should not be viewed as investment advice or an offer or solicitation. Any opinions are solely those of the Strategy & Research Team of CBRE Global Investors and are subject to change without notice, and may not be consistent with market trends or future events. This research is based on current public information that we consider reliable, but we do not represent it as accurate, updated or complete, and it should not be relied on as such.

Copyright © 2019, CBRE Global Investors, LLC. All rights reserved.

RETAIL

Source: CBRE EA

Source: CBRE EA

Source: CBRE EA

Source: CBRE EA

INDUSTRIAL

APARTMENTS

INDUSTRIAL SECTOR DOESN’T DISAPPOINTThe U.S. industrial sector maintained the solid momentum of the past several years into 2018. Net absorption posted another robust performance, close to 230 million sf for the year and staying well ahead of new supply. The availability rate fell 30 bps over the last four quarters to 7.0%, 270 bps lower than its prior cyclical low in mid-2007. Despite a heavy construction pipeline, strong pre-leasing trends in the newly-built industrial product have helped keep the availability levels stable – quite the feat for a sector that can generate a quick supply response. Over 43% of construction is concentrated in five markets – Chicago, DFW, Atlanta, Houston and Riverside. Trade wars have yet to make a meaningful impact as fundamentals are healthy and rent growth registered another good year.

HOTELS

RETAIL BATTLES ITS WAY OUT OF A LONG FUNKRetail has always been the sector that needs to evolve with changing fashions and 2018 was no different. The neighborhood and community shopping centers segment’s fundamentals rebounded from the setbacks from the year prior and availability declined back to 9.0%. Retail spending is on an upward trajectory thanks to a solid job market, rising wages and confident consumers, even as higher prices and high rents eat into disposable incomes. The Christmas shopping season was one of the strongest in six years according to Mastercard data. Demand continues to handily outpace supply as developers shy taway from the sector. Lifestyle centers and malls, as well as power centers, have lower availabilities at around 5.3% and 6.9% respectively, but are struggling with negative absorption and rising availabilities in the last two years. However, well located and conceived centers continues to head in the right direction at a slow but steady pace.

APARTMENT FUNDAMENTALS SAIL THROUGH 2018Demand for apartments was impressive in 2018 even as supply surges dominated headlines. The tailwinds of an energized labor market and favorable demographics were given an additional boost by a for-sale housing market that is low on inventory and high on prices and mortgage rates, effectively locking out many buyers. Permit activity in 2018 also picked up a little momentum indicating that the anticipated slowdown in construction after 2019 may not be as meaningful and supply could remain an ongoing concern. Many urban/infill locations are oversupplied, concessions are common and investors are adjusting their pricing expectations. Suburban locations that are proximate to employment, retail and transit are gaining favor as rents in downtown luxury high-rises have soared. Overall sector vacancies are creeping up slower than many expected, held at bay by construction delays and a strong bump in demand in 2018.

HOTEL SECTOR REBOUNDS MODESTLYThe hotel sector’s fundamentals rebounded overall in 2018 with the last quarter building on the momentum set in the first half of 2018. Occupancy in Q4 2018 increased by 40 bps year-over-year as confident consumers spent more on travel. Gains in ADR YoY remained modest at 2.0%, 50 bps lower than the growth witnessed in the same quarter last year. RevPAR continued to grow as well at 2.4%, but slower than above 4% rate witnessed during the same time last year. After seeing a significant deceleration, San Diego produced the largest RevPAR growth in the nation, north of 12%, driven by strong ADR gains. Within the top ten markets for RevPAR growth, eight were driven by occupancy gains, a pick up from only six markets in the previous quarter.

6%

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Absorption (L) Availability Rate (R)

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

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Uni

ts (T

hous

ands

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Absorption (L) Vacancy Rate (R)

-2%

0%

2%

4%

6%

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14%

-100

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YoY

Change in Occupancy (L) ADR RevPAR

6%

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9%

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14%

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24

Q4 10 Q4 11 Q4 12 Q4 13 Q4 14 Q4 15 Q4 16 Q4 17 Q4 18

SF m

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nsAbsorption (L) Availability Rate (R)