This document summarizes the current state of the real estate market recovery based on an analysis of market fundamentals and economic indicators. It finds that while some property types like multifamily are past pre-recession peaks, others like retail and office are still below. Overall, strong economic growth and labor market improvements suggest the recovery is continuing and market fundamentals remain positive, indicating the recovery is not over yet.

1. ARE WE THERE YET
By William Ross, President
When on any long car trip, the most common question kids have been
asking for years is “Are we there yet?” Many real estate professionals
are asking the same question concerning the robust recovery in real
estate. Is the market seeing the top of the recovery period, or do we have
room to continue the incredible recovery in this asset class for a while
longer? We’ve been on this trip for a while now, so let’s get out the map
and see where we are.
Overall, the current real estate market is posting impressive results in
terms of rent growth, occupancies, overall construction and absorption
levels that we have not experienced since 2007. In many markets, we
are seeing absolute rent levels well past pre-recessionary peaks. A quick
look at the four main real estate property types reveals that multifamily
pricing is well above its pre-recession peak, retail and office are both
gaining momentum but are still slightly below their previous peaks, and
industrial pricing is very near its peak levels of 2007 with a robust 5%
annual rent growth and near cyclical low vacancies.
Let’s examine those four property types a little closer:
• Multifamily fundamentals have remained strong, but vacancies
should begin to rise this year. New construction is expected to total
roughly 220,000 units this year and 190,000 next year. Rent growth will
likely slow from its current pace of about 3.5% but remain positive as the
demographic trends that have fueled the multifamily market’s growth are
expected to continue.
• Office fundamentals are still recovering slowly, but recent figures
imply that strong job growth might finally be supporting a faster rate of
office rent growth and absorption. As of the end of the first quarter of
2015, there was more than 108 million square feet of office construction.
• Retail vacancy in the United States was down to 6.1% in the second
quarter – the 12th consecutive quarter of vacancy decline. Currently,
there is only 60 million square feet of retail space under construction.
• Industrial properties are enjoying a broad-based recovery—both
warehouse/distribution and flex/R&D are getting stronger each quarter.
Vacancy rates declined to 6.8% at the end of the first quarter of 2015
with 148 million square feet under construction.
• Capital markets are getting stronger with each passing quarter.
Transaction volume continues to reach post-recession highs while cap
rates across major sectors hit post-recession lows.
Things look pretty good overall, but real estate doesn’t operate in a
vacuum. We also need to look at the broad economy and what is ahead
for the United States. A few facts we need to consider as we gauge the
status of the market include:
• Economic growth is not slowing. The most recent quarterly reading
of 3.7% GDP growth in the second quarter is well ahead of the first
quarter’s 0.6%.
• The labor market continues to improve at a healthy pace. Job creation
over the past 12 months has averaged 243,000 jobs per month—a
healthy rate that doesn’t signal a slowdown.
• The U6 unemployment/underemployment rate just reached 10.4%, its
lowest level in 7 seven years—another indication that slack in the labor
market continues to decrease.
• Inflation remains relatively benign and not indicative of an economy
that is overheating. CPI is up only 0.2% over the past 12 months.
• The decline in energy prices during the past year or so has mostly
accrued to savings and not spending. Therefore, the U.S. consumer has a
lot of dry powder just waiting to be unleashed.
• Consumer confidence in August, as measured by the Conference
Board, reached its highest level since January.
• Although new home sales have been flat since the beginning of the
year, existing home sales of 5.59 million (annualized) are up to their
highest level since early 2007 and are indicative of an economy in
recovery, not one that is stalling.
We’ve put on a lot of miles during this part of the real estate cycle and
the overall market appears to be in good shape. Are we at the top of the
market? Based on current real estate fundamentals and economic data at
hand, I would tell the kids (as parents have done many times), “No, we’re
not there yet!” v
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4Q | 2015