Integra's Cycle Monitor Reveals 63% of Multifamily Markets Face Hypersupply

Integra Realty Resources (IRR), in their latest report, "Viewpoint 2024," highlights a major shift in the multifamily market, which is at a crossroads as the industry grapples with economic changes.

Market status: Integra's Cycle Monitor uncovers a complex scenario despite the multifamily sector's past dominance. Only 13% of markets are in recession, signaling robust market health. However, a concerning 63% of markets are grappling with hypersupply issues. This glut, fueled by a surge in capital investment, hints at an impending supply-demand imbalance, possibly leading to more volatile market shifts ahead.

Housing starts: There's an unprecedented boom in multifamily housing starts, with projections of 1.5 million new units by 2025. But, this macro trend masks local disparities. Cities like Austin, Nashville, and Charlotte are experiencing unsustainable apartment completions, potentially leading to higher vacancy rates and declining rental prices, upsetting the market's balance.

Investor sentiment: The investment climate is also evolving. 2023 saw a decline in transaction volumes, contrasting sharply with the COVID recovery phase. The risk premium in multifamily cap rates — which average between 5.5% and 6.2% on a national basis — is now very thin compared to 10-year Treasuries, which are at about 4.5%. This shift indicates a reevaluation of the risk-reward dynamics, hinting at possible recalibrations in pricing and income expectations.

Shifting tides: As a result, the affordability crisis favors Class B over Class A multifamily properties, with a significant $650 to $800 rent gap favoring Class B, especially in the West. This is evident in lower Class B vacancy rates, and investors are responding by aligning cap rates closely between the two classes. Post-COVID-19, there's a shift away from larger homes suited for extensive remote work as more people return to the office.

Housing choices: The decision between owning and renting is also a key factor influencing the multifamily market. A study by SmartAsset.com reveals significant disparities in this aspect across major U.S. cities. In some cities, the difference between monthly mortgage costs and average apartment rents is marginal and unlikely to shift homeowner demand toward rentals. However, renting has become a more attractive option in markets like Los Angeles, New York, Seattle, and San Francisco, where the gap exceeds $1,000.

➥ THE TAKEAWAY

Zoom out: IRR’s Viewpoint 2024 presents a mixed outlook for commercial real estate investment, balancing steady U.S. economic growth with global uncertainties. Resilient yet evolving employment trends are affecting multifamily markets, and there is a challenging borrowing environment due to higher interest rates aimed at curbing inflation. This backdrop is slowing fresh capital from flowing into the commercial real estate sector, particularly new developments in 2024.

Retailers Abandon Malls For Strip Centers And Other Outlets

As consumers continue to show a preference for shorter and more convenient shopping experiences, national chains are exiting malls and opting for outdoor, non-mall locations. 

What’s in a mall? Specialty retailers, including jewelers and shoe stores, are also following suit. The shift comes as many retailers find they perform better in locations like grocery-anchored shopping centers and strip malls, leading to cost savings. According to Brandon Svec from CoStar, these retailers are growing more confident in off-mall locations due to consistent outperformance.

Ditching malls: Bath & Body Works plans to open 95 new locations while closing 50, primarily in struggling malls. More than half its stores in the U.S. and Canada are now outside of enclosed shopping centers. Foot Locker aims to operate 50% of its N.A. square footage outside malls by 2026. And Signet Jewelers is closing 150 locations, mostly in traditional malls, as off-mall spots show stronger margins. Around 60% of Signet Jewelers' total square footage is now outside of malls.

Fewer feet: U.S. malls saw a 4% drop in foot traffic in 2023 compared to 2022. This is 12% less than 2019, according to Green Street. Low-end malls have been most impacted, partially due to higher numbers of department store closures. Online sales data has helped retailers identify successful store locations more accurately, contributing to the shift away from malls. Moving out of malls also allows reduces common-area fees and maintenance charges.

Outdoor advantages: Outdoor shopping centers and strip malls provide convenience, especially as retailers increasingly offer in-store pickup and returns for online purchases. The flexibility of running errands closer to home has led to more visits to outdoor shopping centers. Rents for open-air space have risen to nearly $24 PSF, the highest level recorded since Cushman & Wakefield started tracking it in 2007.

➥ THE TAKEAWAY

Shopping will never die: While traditional mall owners have reported record-high leasing volume for higher-end centers, the decline in foot traffic and increased demand for open-air space suggest malls are facing challenges. The shift towards outdoor and non-mall locations reflects retailers' efforts to adapt to changing consumer preferences and optimize their performance in an evolving retail landscape.

According to CBRE, the more industrial space available in major U.S. metros, the higher the average building and parking rents. For example, NYC currently has 3 MSF available for rent, at an average $40 PSF for building rent and $18 PSF for parking. Meanwhile, Chicago, with a little less than 1.2 MSF available for rent, is seeing $35 PSF for buildings and $10 PSF for parking.