Denver-based Integra Realty Resources, one of North America’s largest independent commercial real estate valuation and consulting firms, recently released its highly anticipated mid-year, local market commercial real estate reports — a supplemental update to its flagship Viewpoint 2021 annual report released in January.
In total, 240 detailed reports covering 60 U.S. markets across four property types, including office, multifamily, retail, and industrial, have been released. Along with the local market reports, IRR has released a summary document that includes updated property summaries, market cycle charts, and market rents and vacancy rates comparison charts for each of the four property sectors.
The reports can be downloaded for free. To view the summary report, visit www.irr.com/research. To view local market reports, visit each office landing page and scroll down to the research section.
“We are proud to offer these insightful mid-year market reports to our valuable clients and partners who count on them to make informed real estate decisions,” said Anthony M. Graziano, MAI, CRE, CEO of Integra Realty Resources. “Through April 2022, Integra observed the commercial market showed few signs of restraint, however, the second quarter surely slowed deal-making. While the performance of different asset classes vary depending on supply and demand dynamics in each local market, overall, we expect the back half of 2022 and most of 2023 to be turbulent. This will create opportunity for disciplined investors and normalize pricing to stay in balance with economic productivity and business activity following two years of aberrant government financial intervention. A reset on real estate values is a necessary component of managing inflation since occupancy costs affect consumer spending and the production costs of goods and services. In other words, the quicker we take our medicine, the quicker we can return to stability.”
Below are a few highlights from IRR’s mid-year reporting:
- Office:
- IRR reports the capital markets’ tolerance for increased risk in the office sector made financing office buildings much more challenging by early May 2022. Office owners-investors are now re-trenching for a longer holding period as they continue to await a return-to-work beyond the 30 to 40 percent attendance in most urban markets.
- At the onset of 2022, only 3.4 percent of office markets reported to be ‘In Balance,’ that figure has now reached 11.6 percent in Q2 2022 (vs. 10.7 percent in 2021 and 43.5 percent in 2020). While the Central and East Regions don’t have any markets in the expansion phase, it’s a different story in the West and South Regions, which have 14 percent and 22 percent respectively.
- Office rents increased across all regions, with Class-A property rents in the South Region increasing the most (up 1.52 percent)
- Vacancy rates have increased across the board, except for Class-B office properties in the Central Region (down 53 bps)
- IRR’s mid-year outlook calls for 43.3 percent of suburban Class-A office markets to experience cap rate increases (up from 15.3 percent in Q4’21). While 48.3 percent of markets expect cap rates to remain unchanged (down from 72.9 percent in Q4’21).
- IRR’s outlook calls for 45.6 percent of CBD Class-A office markets to experience cap rate increases (up from 16.9 percent in Q4’21). While 49.1 percent of markets expect cap rates to remain unchanged (down from 67.8 percent in Q4’21).
- Multifamily:
- IRR reports multifamily assets traded at record highs as most U.S. residential markets rocketed through Q1. Recent activity suggests a dramatic cooling in single-family home volume and values, and this will surely affect forward rental rate forecasts negatively.
- IRR reports 80 percent of U.S. multifamily markets are in the expansion market cycle phase, up from 76 percent in Q4 2021.
- Rents increased across all regions; Class-B property rents in the South Region increased the most (up 10 percent)
- Nationally, vacancy rates have dropped for both Class-A and Class-B properties (down 5 bps and 48 bps respectively), however the only regions that saw increases in vacancies were Class-A properties in the East and Central regions (up 38 bps and 28 bps respectively)
- Integra’s Viewpoint research indicates continued cap rate contraction. Urban Class-A cap rates are 4.73 percent (down 17 bps), urban Class-B cap rates are 5.41 percent (down 20 bps), suburban Class-A cap rates are 4.87 percent (down 21 bps), and suburban Class-B cap rates are 5.48 percent (down 25 bps).
- Retail:
- IRR reports retail remains on the rebound from COVID lows, but consumer spending has yet to materially pull back, buoyed by seasonal summer recreation. Personal consumption declines should be expected in Q3-Q4 2022, particularly if layoffs become more widespread. Consensus opinion is an increase in unemployment of 100 – 150 basis points by year-end.
- IRR reports 32.8 percent of national retail markets entered Q2 2022 in the expansion phase (up from 27.1 percent in Q4 2021).
- The Central Region was the only region that saw rents decrease (down 8.27 percent for Community Retail and 9.42 percent for neighborhood retail assets). The Central Region also saw the largest increase in vacancies (up 143 bps for community retail properties and 78 bps for neighborhood retail assets)
- The West Region saw the largest decreases in vacancies (down 250 bps for community retail properties and 324 bps for neighborhood retail assets)
- Nationally, community retail cap rates in Q4’21 bucked the upward trend that started in 2017 with a YOY drop of 25 bps in 2021. In Q2’2022 they continued to drop by 3 bps with cap rates ending at 6.89 percent. Meanwhile, 39.3 percent of markets expect neighborhood retail cap rates to remain steady (down significantly from 72.9 percent in Q4 2021) and 33.3 percent of markets expect regional mall cap rates to remain steady (down significantly from 81.1 percent in Q4 2021).
- Industrial:
- IRR reports the big variable heading into late 2022 will be whether industrial assets will finally cool. With construction demand waning and a potential pull-back in consumer spending, the market may finally catch up to industrial. It hasn’t happened as of June 2022 in most U.S. markets, according to IRR.
- IRR data shows 87 percent of industrial markets are in the expansion market cycle phase, heading into the second half of the year, slightly down from 90 percent in Q4 2021.
- Huge swings in rents, depending on region, for example:
- Central Region saw rents increase over 20 percent for both flex and industrial properties (up 22.57 percent and 25.23 percent respectively)
- West Region saw rents decrease more than 25 percent for both flex and industrial properties (down 27.55 percent and 25.41 percent respectively)
- Nationally, vacancy rates have dropped for both flex and industrial properties (down 182 bps and 243 bps respectively), with the Central Region experiencing the largest drop in vacancies (down 413 bps for flex and 242 bps for industrial properties)
- The industrial warehouse and manufacturing property sector Q2 2022 cap rates stood at 5.78 percent nationally. After rising slightly in Q4 2018, cap rates have continued to compress, dropping 25 basis points since Q4 2021. Flex Industrial property cap rates stood at 6.39 percent nationally. Flex Industrial property cap rates, after rising slightly in Q4 2018, have continued to compress, dropping 27 basis points since Q4 2021.
