Attached is the 2018-2019 Forecast and Commercial Real Estate Market Report for Washington County.
I hope all you had a great year end and an incredible start to the new year.
It’s been a while since I have done my real estate market update. Sorry for the break, but it’s been a little busy around here!
I enjoyed seeing several of you at the commercial real estate breakout session and at the Economic Summit “What’s Up Down South”.
Some of the takeaways on the market report…All sectors are strong. We saw rent growth across the board in all sectors. Office led the charge with the largest drop in vacancy. Industrial bumped up in vacancy, but in reality, is still very tight.
Retail vacancy held mostly flat. Hospitality and VRBO is looking a bit bubblish. Almost 2,000 hotel rooms have been added in the last three years with more in the pipe.
Nearly the same number of VRBO’s have been added. It’s unprecedented. I’ll cover each sector quickly here, but encourage you to look at the report for more insight.
Industrial:
Industrial saw about 22% in weighted average rent growth year over year. Rental rates are at historic highs. Are we going to go down anytime soon? I would say no.
Why not?
We have very little new spec construction coming to the market. We had almost 650,000sf of new completed construction in 2018. Maybe 175,000sf of this was spec.
The problem we have is that rising construction and permit/impact fee costs have kept margins pretty thin so most larger spec has been kept at bay.
Small metal buildings of around 5,000sf have been very popular for smaller owner/users. Of the 4.35% vacancy number, Viracon represents 55% of that and the old sleeping bag factory represents 23%.
The true vacancy most of the smaller users looking in the market are feeling is around 0.95%! I expect more of the same in 2019 for industrial.
Office:
Vacancy dropped to a 10 year low of 4.3%. Lease rates are up 13%. Most growth has been centered around the medical office sector. We expect this growth to continue with a lot of new construction expected in 2019.
Retail:
Large retail such as big-box and mid-box has been subdued. Most of the retail growth has occurred around the recently completed grocery anchored centers. Record rents numbers are being achieved in some sectors of retail. We expect vacancy to stay flat through 2019.
Overall, this market is going to stay strong through this year. The upcoming recession will not be real estate caused, but will be more of a geopolitical issue, student loan debt, or corporate debt cause. Maybe a combination of a few of those.
We love working with you, our clients! Please let us know if you or anyone you know is looking to buy, sell or lease space. We can help on the development side or property management front as well.
Have a great year and we look forward to a great 2019 with you!
2019 Economic and Housing Forecast
By Matthew Gardner, Chief Economist, Windermere Real Estate
What a year it has been for both for the U.S. economy and the national housing market. After several years of above-average economic and home price growth, 2018 marked the start of a slowdown in the residential real estate market.
As the year comes to a close, it’s time for me to dust off my crystal ball to see what we can expect in 2019.
The U.S. Economy
Despite the turbulence that the ongoing trade wars with China are causing, I still expect the U.S. economy to have one more year of relatively solid growth before we likely enter a recession in 2020.
Yes, it’s the dreaded “R” word, but before you panic, there are some things to bear in mind.
Firstly, any cyclical downturn will not be driven by housing.
Although it is almost impossible to predict exactly what will be the “straw that breaks the camel’s back”, I believe it will likely be caused by one of the following three things: an ongoing trade war, the Federal Reserve raising interest rates too quickly, or excessive corporate debt levels.
That said, we still have another year of solid growth ahead of us, so I think it’s more important to focus on 2019 for now.
The U.S. Housing Market
Existing Home Sales
This paper is being written well before the year-end numbers come out, but I expect 2018 home sales will be about 3.5% lower than the prior year.
Sales started to slow last spring as we breached affordability limits and more homes came on the market. In 2019, I anticipate that home sales will rebound modestly and rise by 1.9% to a little over 5.4 million units.
Existing Home Prices
We will likely end 2018 with a median home price of about $260,000 – up 5.4% from 2017. In 2019 I expect prices to continue rising, but at a slower rate as we move toward a more balanced housing market.
I’m forecasting the median home price to increase by 4.4% as rising mortgage rates continue to act as a headwind to home price growth.
New Home Sales
In a somewhat similar manner to existing home sales, new home sales started to slow in the spring of 2018, but the overall trend has been positive since 2011.
I expect that to continue in 2019 with sales increasing by 6.9% to 695,000 units – the highest level seen since 2007.
That being said, the level of new construction remains well below the long-term average. Builders continue to struggle with land, labor, and material costs, and this is an issue that is not likely to be solved in 2019.
Furthermore, these constraints are forcing developers to primarily build higher-priced homes, which does little to meet the substantial demand by first-time buyers.
Mortgage Rates
In last year’s forecast I suggested that 5% interest rates would be a 2019 story, not a 2018 story.
This prediction has proven accurate with the average 30-year conforming rates measured at 4.87% in November, and highly unlikely to breach the 5% barrier before the end of the year.
In 2019, I expect interest rates to continue trending higher, but we may see periods of modest contraction or levelling. We will likely end the year with the 30-year fixed rate at around 5.7%, which means that 6% interest rates are more apt to be a 2020 story.
I also believe that non-conforming (or jumbo) rates will remain remarkably competitive. Banks appear to be comfortable with the risk and ultimately, the return, that this product offers, so expect jumbo loan yields to track conforming loans quite closely.
Conclusions
There are still voices out there that seem to suggest the housing market is headed for calamity and that another housing bubble is forming, or in some cases, is already deflating. In all the data that I review, I just don’t see this happening. Credit quality for new mortgage holders remains very high and the median down payment (as a percentage of home price) is at its highest level since 2004.
That is not to say that there aren’t several markets around the country that are overpriced, but just because a market is overvalued, does not mean that a bubble is in place. It simply means that forward price growth in these markets will be lower to allow income levels to rise sufficiently.
Finally, if there is a big story for 2019, I believe it will be the ongoing resurgence of first-time buyers. While these buyers face challenges regarding student debt and the ability to save for a down payment, they are definitely on the comeback and likely to purchase more homes next year than any other buyer demographic.