Julie Whelan:
Consumer trends in the way we work, the way we live, even the way we vacation are pushing both of your assets in the right direction. And these assets will thankfully continue to shape the future of our cities and there are exciting things to come. So industrial and retail is what we're going to move on to next. These are two assets that are fundamentally sound, although the reasons behind those fundamentals are quite different. To discuss these market sectors, I'm joined by Amanda Ortiz, U.S. Industrial Research; Pol Marfa, Europe Industrial Research; and Brandon Isner, U.S. Retail Research. Welcome, Amanda, Pol and Brandon.
Amanda Ortiz:
Hi, it's great to see you, Julie.
Pol Marfa Miro:
Great to be here, Julie.
Brandon Isner:
Thank you very much, Julie. Great to be here.
Julie Whelan:
Good to see you all. So Amanda and Pol, let's start with industrial. Coming into this year we discussed how industrial could be resistant to a global slowdown in growth, yet we have seen demand slip a little bit in 2023 and rent growth recede. But important to note that both are still in positive territory for your sector. Has this slippage been more than you anticipated? Do you expect industrial demand and rent growth to further moderate? Amanda, let's talk about the U.S. first.
Amanda Ortiz:
Yeah, well for the U.S. this slowdown was definitely expected, and so far it has been more or less what we anticipated. But industrial demand is still fairly strong. Year-to-date absorption totaled almost 126 million square feet, which is about half of what it was last year, but it's also just about right where we were in 2018 and in 2019.
Amanda Ortiz:
So although demand has slowed, the data is showing us that the market is simply normalizing. At the same time, from an anecdotal perspective, there are still plenty of tenants in the market that have space needs, but many occupiers are just exercising a wait-and-see approach to anticipated transaction, mainly due to the lingering economic uncertainty. For occupiers, though, the space needs are there, but various financial factors, like rising interest rates and less available capital, for both new projects and property trades, are just causing some occupiers to pause. And Julie, you also mentioned about rental rates, and as far as rates go, financial uncertainty has also impacted rent growth. Taking rent growth, which is growth based on completed transactions, was almost 17% at midyear. And it seems to weaken just a little bit every quarter. But 17% is still very strong as far as historical year-over-year growth goes.
Amanda Ortiz:
But another reason for moderated rent growth is that influx of new supply to the market. This increased supply has contributed to a more balanced market, just reducing that upward pressure on rents. The market is still on pace though to record double-digit rent growth in 2023. And we project that rents will continue to grow anywhere between 12%-15% at year end. So all this to say, yes, the current state of the market has softened from the record and unsustainable fundamentals of 2021 and 2022, but the outlook moving forward remains very positive as the U.S. industrial sector remains healthier now than it was prior to the pandemic. Pol, have you noticed similar trends in Europe?
Pol Marfa Miro:
Well, I was just agreeing with you because the picture for industrials in Europe is very similar to the one that for the U.S. so leasing activity is down around 30% and our forecast is for it to remain relatively subdued for the rest of the year. We're seeing occupiers struggling to predict their own current demand levels and having very slow decision-making processes and well that's driving the market in the end. Having said that, our recently published European logistics survey showed how the largest occupiers remain very bullish, with over two thirds of respondents planning to expand their logistics footprint over the next three years. Expansion plans are challenged by the still very low supply. In fact, logistics vacancy was exhausted even more in Europe than it was in the U.S. during the pandemic-boosted demand period. And despite a mild increase in the last few quarters, same as in the U.S., we are still below 3% and we don't see it significantly improving anytime soon.
Pol Marfa Miro:
Certainly not getting anywhere near 7% levels that we had just 10 years ago. We also expect that rental growth will moderate from the annual double-digits seen in 2021 and 2022, but will remain positive due to the mentioned supply-demand imbalance. And these robust fundamentals justify the over $14 billion in the investment market that are still targeting European industrial and logistics assets as their main objective, more than any other sector alone in Europe. As Henry and Darin said earlier, there has been strong repricing for logistics in Europe, particularly in the U.K. So even if the market is not very active right now, investors are certainly monitoring it very closely.
Julie Whelan:
Thank you both for the dense data that you have given us. That’s been great. And what you’ve reminded us is that when sectors are normalizing off of record highs, it can lead to a narrative where the normalizing period can be seen as a negative, but in fact it’s actually a positive because we’re getting back to sustainable territory. Now I can tell you as of last week, I have a teenager in my family, and I watch his shopping preferences very closely and I have no doubt that the industrial sector is going to stay alive as younger generations exert so much of their buying power online. So we’re going to move to retail right now. Brandon, as I mentioned, retail also has decent fundamentals, but for very different reasons than industrial. And it’s a little bit of a mixed story. So limited development and strong post-COVID consumer rebound has created resiliency behind retail. But do we expect that this is going to change given the state of the economy and what’s happening globally with this?
Brandon Isner:
Well, Julie, that’s a good question. I would say yes, but you’re right that retail is a bit of a mixed bag globally, as it's so dependent upon the consumer. In Europe, retail sales volumes have been on a mild downward trend as real incomes have been squeezed due to inflation, but they remain about 2% above pre-pandemic levels. So that's fairly solid. The U.K. is essentially in line with their pre-pandemic levels. Consumer confidence remains challenged, but footfall at CBRE-managed retail properties across Europe continues to improve. In the Asia-Pacific region, core inflation has decelerated in China. Richard talked a little bit about this earlier, but it's accelerated in Japan. Spending has continued particularly with urban households, but it looks as if any further spending will be, could be tapping into savings as savings rates have been declining.
Brandon Isner:
We're already seeing a leveling off of spending in June. But tours for available real retail spaces are at a high level, which is leading to generally strong leasing activity. And then we come to the U.S. which is a little bit more confusing. Core inflation is decelerating. Consumer confidence has begun to rebound slightly, but remains well below long-term averages. And some segments of retail are starting to see some cracks, with year-over-year decline in sales for retailers such as home and garden retailers, department stores, electronics and apparel. Additionally, student loans coming back into play in September could mute retail spending this holiday season. Yet the restaurant industry remains very strong, which is a sign of continued discretionary spending. On the real estate side, U.S. retail remains at a very low availability rate of just 4.8%. That all said, despite retail having good fundamentals, it's difficult for retail developers to justify breaking ground on large projects because construction costs remain so high, especially in the U.S. and with little new construction, current tenants have become stickier. Renewal activity among retail REITs has been strong with many reporting near all-time highs in occupancy.
Brandon Isner:
So, again, we're seeing record low levels of activity or availability and we're in a place where news such as the Bed, Bath and Beyond liquidation is actually a positive for the market, as it is opening up space in places where there's very low levels of availability. Tenants need that space and landlords are able to ask for higher rents than the previous tenant was paying, which that's how it's supposed to work, correct? Globally, retail rents are up about 3.9% in the Americas, about 3.8% in Europe and down just about half a percent in the Asia-Pacific region, so fairly strong. Global retail yields are around 5.2%, which is quite attractive to investors that are giving retail a new look. It's a very good balance of supply and demand right now, which should continue throughout the year.
Julie Whelan:
You say that rising rents are how it's supposed to work, and I think that really depends on what side of the equation that you're on, but I understand what you're saying, so that's great. So Brandon, I also love what you said about the big box liquidations because many I have heard may lend themselves to more pickleball courts, which is going to take the place of those retailers. And given I just picked up that sport, I'm all about that development. Excellent. So Brandon, another question for you. We've heard a lot of news about downtowns being challenged in this post-COVID world and some of our legacy High Street districts are experiencing a high level of vacancy for the first time. Is this going to be a long-term problem, or do you see immediate solutions to this?
Brandon Isner:
I don't believe it's a long-term problem. When all this dust settles, these world cities are going to remain hubs of business and tourism and honestly, there's been a noticeable amount of luxury retailers that are investing heavily in their flagship stores along some of these most famous streets in the US and in Europe and the Asia-Pacific region. We recently did a focus report on Toronto where strong tourist activity from China is driving retail and restaurant sales within the Bloor-Yorkville district, which is their high street district. Additionally, a study of seated diners in restaurants within the U.S. found that some of our legacy primary markets, you know, New York, D.C., Philadelphia and Chicago, they're experiencing double-digit growth in seated diners, while some of the hot Sunbelt markets have cooled a bit. And another trend we've noticed is the idea of some of these legacy high street retail districts losing a bit of momentum to the emerging high street retail districts. And this can be due to several factors: more favorable rents in the emerging districts or perhaps the perception of crime in some of the legacy districts can make it a challenge to attract retailers. So many high-end retailers are seeking space in some of these emerging high street areas, which often have the advantage of other areas of new development, such as new multifamily hotel and office development.
Julie Whelan:
Very interesting. These emerging markets are certainly a topic of discussion. I can say I was just in downtown Boston over the weekend and one of the things that they've done in their legacy High Street district is close the street to traffic on Sundays in summer in order to drive more pedestrian foot traffic as a means to attract people, which I think was very interesting and creative. So thanks Amanda, Pol and Brandon for this discussion on retail and industrial. To draw back to Richard's comments in the beginning, he felt that longer-term tailwinds in industrial and retail could counterbalance any economic softness. And you have painted that picture for us nicely.
