Oversupply May Catch On To These Commercial Real Estate Sectors

 

In the United States, Commercial Real Estate certain sectors may be affected by oversupply. According to UrbandLand, construction during the current real estate cycle has generally stayed below historical trends, but deliveries have increased as the cycle matures, prompting a look at whether markets are becoming overbuilt. The following highlights the specific sectors which oversupply may be nearing:

Hotel: STR’s July hotel pipeline report showed 171,276 rooms in 1,305 projects under construction, a 32.6 percent increase from last year. Metro areas with more than 5,000 rooms underway included New York, Los Angeles, Dallas, and Houston, while Miami has been affected by higher levels of new supply, as well as a pullback in demand from Brazilian travelers. Strong pipelines are prompting STR and Tourism Economics to predict stable occupancy, average daily rate (ADR) growth of 3.2 percent, and revenue per available room (RevPAR) growth of 3.2 percent for the United States during 2016. The forecast report estimates that supply will outpace demand in 2017 for the first time since 2009. During 2017, a slight decrease in occupancy will be more than offset by growth in ADR, resulting in 2.8 percent RevPAR growth.

Office: Office construction during this real estate cycle has been low compared with that seen in previous cycles, but some concerns about overbuilding exist. Deliveries totaled 24.3 million square feet (2.3 million sq m) during the first half of 2016, with 98.9 million square (9.2 million sq m) feet under construction, according to Cushman & Wakefield. New construction is alleviating tight market conditions in some markets, and the uptick in vacancy may be temporary as new space is absorbed. However, Jones Lang LaSalle has noted that overbuilding is a concern in Dallas, Houston, and New York, and Sam Zell concurred with the New York assessment in an August Bloomberg interview. San Francisco experienced a worrisome slowdown in office demand during the first half of 2016, but the stock market rebound and growth in venture capital investment have caused tech and life-science tenants to boost demand and developers to grow construction pipelines.

Industrial: Industrial shows few signs of overbuilding. Deliveries during the first half of 2016 totaled 100 million square feet (9.3 million sq m), with another 190 million square feet (17.7 million sq m) under construction at midyear, according to Cushman & Wakefield. Despite the uptick in deliveries, vacancy declined and asking rents rose during the first half of the year. In its second-quarter earnings release, Hamid Moghadam, chairman and CEO of Prologis, noted, “Demand remains ahead of supply in both the U.S. and Europe, leading to all-time low vacancy rates,” and that “consumers continue to migrate toward e-commerce, and companies still need to adapt their supply chain strategies, driving demand for high-quality, well-located logistics facilities.”

Retail: Retail occupancy has shown marginal improvement during the first half of 2016. With 9.5 million square feet (882,600 sq m) of building completions during the first half of the year and 24.6 million square feet (2.3 million sq m) underway at midyear, according to Cushman & Wakefield, the retail sector suffers more from store closures and limited demand than from overbuilding.

*UrbanLand
The statistics indicate that commercial real estate market fundamentals remain healthy overall in the United States. According to UrbanLand, limited new construction has helped keep supply and demand fundamentals in sync. Overbuilding is an increasing concern for these specific sectors.

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Jennifer Lynn

Jennifer Lynn

Jennifer is a business journalist and has over 15+ years of professional experience working in technology, financial, hospitality, real estate, healthcare, manufacturing, not for profit and retail sectors. Specializations in the field of analytics, management consulting serving global clients from medium & large scale organizations. She is a proficient and passionate business executive; manager utilizing analytics data to drive smart business decisions. Technology, Finance, Investments, Retail, Management, Consulting, Strategy. Have published on Forbes.com, Investing.com, and many others. Currently the Commercial Real Estate Contributor for Retail Solutions Advisors.