As Demand Pushes Up Rents and Occupancies at Hospitality and Industrial Assets, Developers Ramp Up Construction
|The 45-story Wilshire Grand in downtown Los Angeles, set for 2017 delivery by Korean Airlines, is one of the largest hotels under construction in the U.S. at 1.3 million square feet.|
The multifamily sector's favored status among developers continued in 2015, with the apartment building boom once again leading all commercial property types in new projects delivered and under construction last year.
The ongoing multifamily construction boom comes as little surprise, given that average U.S. apartment occupancy is north of 96% and the average U.S. rent rose by 6% last year, -- though rent growth slowed to 2.4% in the last six months of 2015.
But other types of commercial construction are also ramping up, helping to boost total under-construction among all five major commercial property types to 1.12 billion square feet at the beginning of 2016.
An analysis of preliminary fourth-quarter and year-end CoStar construction data shows that the hotel sector, followed by logistics and other industrial buildings, comes closest to rivaling the strong rate of apartment construction.
About 33.9 million square feet of hospitality properties was completed throughout all U.S. market last year, comprising 1.12% of total stock. That's up more than 25% from the nearly 27.1 million square feet comprising 0.90% of existing inventory delivered in 2014.
The 70.4 million square feet of hotel projects across 560 projects under construction at the end of December 2015 is 19.5% higher than the same time a year earlier and equals 2.33% of total U.S. hotel inventory. The hotel booms also come closest to matching the multifamily sector's fast construction pace of 2.79% of stock currently under construction, according to CoStar data.
The December 2015 report from STR confirms that U.S. hotel construction, with plenty of new projects in the development pipeline, is up across virtually every chain-scale segment.
The U.S. hotel development pipeline in December included 3,881 projects totaling 469,139 rooms in the construction and confirmed planning stages -- a 13.6% increase from December 2014, including a 17.2% year-over-year jump in rooms already under construction, according to the December 2015 STR Pipeline Report.
Economy properties led all chain scale segments with the largest annual increase in rooms under development in December, rising 70% to 6,801 rooms from a year ago. The upper-midscale segment pipeline rose 23.9% to 157,034 rooms, while the upper upscale, or luxury segment, increased 23.4% to 38,885 rooms.
All segments with the exception of luxury also reported an increase in rooms currently under construction.
"Numbers are up almost across the board, but 69% of the total construction in the U.S. resides in the upscale and upper midscale segments," says Bobby Bowers, STR’s senior vice president of operations. "While the total number of rooms in the final planning phase is up almost 47%, the upscale and upper-midscale segments each reported an increase around 70% in that phase," Bowers added.
The industrial sector trailed closely behind hospitality in terms of overall construction activity, delivering 0.96% of existing building stock last year. The total of 239.4 million square feet delivered in 2015 is up sharply 26.5% from 2014’s 189.29 million square feet, comprising 0.76% of inventory. Another 223.5 million of logistics, light industrial and flex space was under construction as of Dec. 31, totaling 0.89% of existing inventory.
The U.S. office market took on 83.1 million square feet of new supply in 2015, easily outstripping the 2014 total of 68.9 million square feet by 20.6%. Another 143.46 million square feet, or 1.24% of office stock, was under construction as of the end of the year, exceeding the year-prior total of 135 million square feet.
The combined 2015 deliveries of hospitality, warehouse and office properties, however, can’t match the more than 371 million rentable square feet of new apartment properties delivered last year, making up nearly 1.7% of inventory. The delivery total is up from 2014’s already robust total of 342.8 million square feet, which constituted 1.55% of existing multifamily stock.
Moreover, an eye-popping 615.2 million square feet of multifamily projects across 3,781 projects -- about 2.79% of existing multifamily stock, was under construction at the beginning of January. That's up from the 599.24 million square feet at 3,678 buildings under construction at the outset of 2014.
In addition to the 3.7% increase in total CRE deliveries in the five major commercial property types last year, total space under construction as of the end of December jumped by nearly 14% from December 2014 levels, to more than 818 million square feet.
Only the retail sector, which is relatively early in its recovery cycle and is still processing space give backs from closing department stores and other national retailers, did not see a significant annual gain in deliveries last year.
Builders delivered about 90.6 million square feet of retail space making up 0.57% of inventory in 2015, almost identical to 2014 totals. Moreover, the 68.6 million square feet of new retail under construction as of Dec. 31 was down about 12.4% from the 78.3 million square feet under development at the beginning of 2014 just over a year ago, according to CoStar data.