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INDUSTRIAL: Logistics, yet again, is the sector set to see the most rent growth. Although decelerating from its double-digit rates of growth in the past few years, we expect rent growth to be above the long-term average due to the well below average vacancy rate forecast in coming years. With new construction in the sector down over 50% year-over-year, rent growth two to five years out should benefit from diminished supply deliveries. With labour shortages in the sector persisting and electric vehicle adoption increasing, modern logistics stock, better able to accommodate automation and robotics as well as solar power generation and charging, should outperform. We expect annual rent growth of 6% nationally for modern logistics stock over the five-year outlook, led by the coastal and southern metro areas. Legacy logistics should continue to do well, but the very oldest stock could face some obsolescence risk. However, many of these assets occupy favourable, inner-city or intermodal sites, spurring demand for this stock. Thus rent growth just below 5% annually is expected for this market segment for the outlook period.
OFFICE: The overall office market remains challenged. Nationally, the vacancy rate is approaching 20%, its highest point since at least the early 1980s. Modern, responsive offices will outperform legacy stock yet still likely underperform the rental growth of the other sectors. A handful of the very best assets in those metros with the best supply-demand balance should perform quite well yet, excepting those, much of the market may struggle for a few more years yet. Starts are down 48% year-over-year, which will help restore balance and there is some hope that more return-to-office mandates may heighten the relevance of office space to corporate productivity. Still, heightened occupancy risks remain.
Rent growth for the life sciences and medical office sectors is better than for offices generally in part because workers in those industries have a far lower propensity to work from home. In the decade to 2020, US medical office markets delivered an average annual rent growth rate of 2.9%. This has moderated in recent years to around 2%, and we think this lower rate of growth may continue. Although broad demographic drivers such as population ageing and expansion of health insurance offers support, there is still some threat from the high vacancy rates in the overall office market, some of which will be sought out by medical tenants. Life sciences vacancy rates nationally have shot up into the low double digits recently, and we think may well stay there for the five-year period ahead. Market and submarket selection – down to cluster specifics – will be essential to outperform the sector’s modest 1.5% per annum rent growth outlook.
RESIDENTIAL: Multifamily markets nationally have seen an abrupt deceleration of rent growth. The trailing annual market rent growth in the 12 months to Q3 2023 was barely 1%, a far cry from the strong double-digit rent growth in the prior two years. Despite some near-term vacancy increases as heavy supply volumes deliver, falling starts (also down over 50% year-over-year) should help rebalance the sector, resulting in more normalised rent growth of 3.2% per annum over the five-year outlook. With the average household size in the US getting smaller, more appropriately sized apartments – available at accessible rental price points – will be needed across the US. In addition, the average age of the US housing stock is over 40 years old, creating opportunities for value-add strategies to improve standards and finishes and bring rents up to market. We expect single family rentals – still in their infancy as an institutionalised property type, at least in the unlisted space – to perform even better, at 3.6% rent growth annually in the five-year outlook. This is half the rate of growth recorded in the trailing 12-month period. Student accommodation rental growth ahead should fall back more in line with longer-term historical averages, and thus well down from the 15.5% recorded in the past year.
RETAIL: As vacancy rates have dropped to their lowest level in decades for neighbourhood and community centre (NCC) retail, we have cautiously upgraded our outlook for its prospects although the local catchment area prospects will matter more than market-wide fundamentals. Having been shock-tested by the structural rise of e-commerce and pandemic-related closures, retailers and retail centres today are hoping to thrive rather than merely survive. With very minimal construction, strong near-term labour markets supporting consumption and some productivity gains from greater automation, we anticipate NCC rent growth of over 3% per annum in the outlook. More bleak, though, are the rent prospects for malls. Again, a select portion of the market should do well, but with mall vacancy surpassing 9% nationally and thus the highest vacancy rate in decades, rents are expected to remain flat through the outlook.
OTHER: Self-storage construction starts are up year-over-year, mostly concentrated in more secondary and tertiary locations and cities. Nationally, we expect street rents to grow by 1.3% per annum in the five-year outlook following a fall of over 5% in the 12 months to Q3 2023. But income returns should remain attractive thanks to existing customer rent increases (ECRI) , which are prevalent in the sector.
Despite good structural demand for data centres arising from the wider adoption of artificial intelligence among other factors, national vacancy may increase to over 10% in the outlook period and thus rent growth nationally will be broadly flat.
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