Rents Aren’t Reversing Anytime Soon March 26, 2018 Marc DeLuca In all commercial real estate sectors, rents are on the rise. This is happening alongside the prediction that construction spending and starts are expected to remain strong — if a bit more subdued — in 2018, according to ConstructConnect. Their construction forecast shows a 4.8 percent increase, to $773.1 billion. Commercial construction is expected to have a 12.4 percent increase in starts in 2018, and conservative growth through 2021. What will greatly affect office rental statistics is the demand for specific detail within the property itself: green design, flexibility, coworking space, and efficiency. Forbes predicts that rent gains should allow for stability in leasing and leasing negotiations. Also forecasted: investment and development are expected to decrease, and vacancy rates are to rise. Capital values and rents are expected to experience modest growth rates. Investors will focus on office markets that offer higher returns and exhibit economic diversity. Nationwide, the office markets expected to thrive in 2018 include Atlanta, Austin, Boston, San Francisco, Seattle, and Nashville. In the multifamily sector, the trends of coliving and community-driven residential environments will continue to have an impact on what gets rented in 2018. Benjamin Pleat, founder of Doorbell, Inc., told Forbes, “Coliving and community-driven residential will increasingly have a larger impact on the multifamily industry as it changes to reflect a new wave of renter demands and wants. Just as amenities have defined the last decade of commercial real estate development, the need for unique experiences and services will heighten competition.” According to Yardi, in January 2018, the national average U.S. multifamily rent rose by one dollar, to $1,368. This matches the national average rent recorded in July 2017 by Yardi Matrix’s Matrix Monthly report. Rents rose 2.8k percent year-over-year at the national level through January. That’s a 20-basis-point jump from December. Yardi expects rent growth to remain in the 2.5 percent range. Yardi also reports that in 2017, roughly 300,000 new apartment units were created nationwide. This new supply is necessary to meet current and future demand, and to address affordability issues in some markets. The rent of deliveries is likely to peak in 2018, with new construction permits on the decline. From the fourth quarter of 2017 to the second quarter of 2019, multifamily rent growth is expected to grow 5.2 percent, according to Statista. The city with the fastest rent growth: Sacramento, with an increase of 9.3 percent over the past year. Reno, NV came in second with 7.5 percent year-over-year growth; Orlando, FL came in third, with rents growing by 7.2 percent. Measuring by states, Idaho experienced the fastest year-over-year growth in the country, at 4.9 percent. Nevada, Utah and California all saw growth of more than four percent. The 2017 University of Southern California Casden Economics Forecast reports that renters in Los Angeles, Orange and San Diego counties — as well as those in the Inland Empire — will pay an additional $121 to $149 in rent each month by 2019. The primary drivers: rising employment and low rates of homeownership. The Robb Report finds that renters outnumber homeowners in 22 more U.S. cities. Those cities are Toledo, Ohio; Memphis, Tennessee; Tampa, Florida; Hialeah, Florida; Stockton, California; Honolulu, Hawaii; Anaheim, California; Baton Rouge, Louisiana; Santa Ana, California; Columbus, Ohio; Detroit, Michigan; Cleveland, Ohio; Baltimore, Maryland; St. Louis, Missouri; Minneapolis, Minnesota; San Bernardino, California; San Diego, California; Sacramento, California; Reno, Nevada; Chicago, Illinois; Fresno, California; and Austin, Texas. An earlier Robb Report study found that the average apartment rent increased by 2.5 percent in 2017. Marc DeLuca is Regional President overseeing the Eastern U.S. As regional president for KBS, Mr. DeLuca is responsible for all acquisitions, dispositions and asset management activities in the Northeast, Mid-Atlantic, Southeast and Ohio. Mr. DeLuca is also chairman of the KBS Investment Committee that meets regularly to review and approve all new investments for the firm.