More economic news on this Friday. Wells Fargo Securities’ Economics Group has released its 3rd Quarter Community Real Estate Chartbook.
Improvement in the nonresidential space has been hard to come by, but one thing is clear, the recovery that has played out thus far has been unevenly distributed across property types and geographic location. Apartments have been the dominant force in commercial real estate gains in this cycle. This sector has been a beneficiary of changing demographics and has prospered because of, rather than in spite of, symptoms of the Great Recession. Another player is now clearly emerging on the scene: industrial space. While apartment demand remains robust, supply is close on its tail. Industrial demand, however, continues to far outpace supply, which has been a boon to rent growth and vacancy rate declines.
Generally, conditions are best in the West, according to this national report. The South is also doing well while the Midwest and Northwest “are still just barely in expansion territory.”
One interesting takeaway from the report is the theory, as evidenced by improvement in the industrial sector combined with sluggish demand for retail space, that the retail sector may be undergoing a fundamental change.
The source of [the industrial] sector’s success is likely due in part to the changing business environment, as retailers move away from traditional storefronts and toward a more online marketplace. This move by businesses is a strategy to keep costs contained and to maintain alignment with consumer demand as technology evolves. Customers are becoming increasingly in favor of online shopping and look to brick-and-mortar establishments as more of a showroom than a locale of purchase (if they even step foot in them at all). Growth in e-commerce has led to a surge in demand for industrial/warehouse space, as retailers need a place to store inventory, even if they opt out of a traditional storefront. Shopping online is likely more of a transition and less of a trend, thus we suspect the industrial sector will continue to pick up in the coming years, beginning with a near-term acceleration and longer-term moderation.
The report also reveals the apartment vacancy rate in Las Vegas declined more than any other market and describes Sin City’s apartment market as one of the most improved over the last year.