by Kevin Thorpe, Global Chief Economist
A look at the up and down sides of overbuilding, the industrial explosion, retail disruptions, and the continuing powerful potential of eCommerce growth.
Global Office Glut
Right now, there is over 700 million square feet of office space under construction in the world – an intimidating amount by any measure. Aggregate supply will exceed demand, so from that perspective, the world is absolutely unequivocally overbuilding.
There are a handful of markets in the U.S. that have a lot of new space under construction: Brooklyn, Austin, San Francisco, Nashville, Seattle, Denver, New York Midtown, Raleigh, and San Jose are most at risk.
At the same time, we know that tenants generally prefer new, high-quality office space, so you could argue that the world is finally upgrading its office inventory to give tenants what they really want.
But this massive wave of supply is going to create some pain. On both ends of the spectrum – premium and low-end – demand should remain pretty consistent. Those in the middle, however, are more likely to struggle. We see B+ and A- buildings as having a tough time over the next few years as they work to compete with new space.
Retail Reels While Industrial Booms
eCommerce is a phenomenon that’s changed, well, almost everything. When you consider that there are two billion or so millennials in the world, ages 20-35, who will soon be hitting their prime spending years, and that smartphone adoption still has a lot of room to grow globally, it’s safe to conclude that the furious pace of eCommerce growth is far from over.
This seismic change is clearly wreaking havoc on parts of the retail sector. We estimate there will be more than 10,000 store closures this year in the U.S. alone—which translates into approximately 27 store closures every single day. And, next year, it’s only going to get worse with about 12,000 stores expected to close.
But the lesser told story is that certain sectors in retail are actually thriving.
Food-centric retail, restaurants and bars, health and fitness, and experiential retail are just some examples. Basically, anything in retail that can’t be purchased from behind a computer is doing well. Meanwhile, many retail properties located mostly in the suburbs are facing obsolescence, unless they are repurposed to meet changing needs.
Then, there’s the industrial side. Just as eCommerce is stealing demand from retail real estate, it’s also fueling record industrial growth. Industrial is on fire with absorption hitting levels we’ve never seen before. Industrial vacancy is at record lows and we’re seeing stunning rent growth in numerous cities.
The sector is also benefitting from an increasingly confident and wealthy consumer. Demand is stronger in multiple areas including food, housing, clothes, and electronics.
So, in conclusion, yes, there are always the unknowns that can destabilize any economy, but when you weigh the data and the trends, we remain optimistic that this cycle is far from over—and that there remains plenty of opportunities for the discerning investor. As I said in Part 2: Think of where we are as the end of the easy times, not the end of the good times.
Kevin is Cushman & Wakefield’s Global Chief Economist, focusing on global economic trends and forecasts. He and the firm’s worldwide research team produce studies and statistics on topics affecting the global and U.S. economy, capital markets, finance, leasing fundamentals, property and project management and factors that affect supply-demand fundamentals in commercial real estate. Kevin has developed several econometric models to predict market trends, is a member of the National Association for Business Economics (NABE), and has authored numerous studies and survey reports. In 2014, he was recognized as the nation’s most accurate economic forecaster with the NABE’s Outlook Award.