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Which Commercial Real Estate Sectors Are Approaching Oversupply?

2020 and the years ahead won't come without difficulties for the commercial real estate market. In the United States, certain Commercial Real Estate sectors may be affected by oversupply. the Urban Land Institute states that construction during the current cycle has been below historical trends, but as the cycle matures, we need to look at whether markets are becoming overbuilt. Oversupply may be around the corner for these Commercial Real Estate Sectors:

We expect to see some risk of oversupply in Class A multifamily and industrial properties, but the changes that have heightened the demand compared to historical norms should lessen the material impact on fundamentals, which are expected to stay solid.

Please NOTE:    This is a general overview of the market sectors across the nation, your specific sub-market may be having substantially different experiences, please consult with a professional commercial real estate agent in your specific sub-market for more details.

Industrial Real Estate Sector

Industrial real estate also shows signs of overbuilding. Demand stays ahead of supply in both Europe and the U.S, leading to lower vacancy rates. However, as consumers continue to shift toward e-commerce, companies still have to adapt their supply chain strategies and drive the demand for well-located and high-quality logistics facilities.

The industrial real estate sector is also heading for slower growth, according to a forecast by the Deloitte Center for Financial Services. The sector, which includes warehouses, flex spaces, distribution centers, and other industrial properties with storage facilities, has been facing sustained demand over the past few years. But potential marketplace changes, including market oversupply, growing e-commerce demand, a higher cost of capital, and rising interest rates, will probably mean slower growth, according to the report.

While warehousing continues to be steady, the decrease in demand growth is going to be an issue for owners, so they need to be more creative in how they buy and use industrial real estate, Deloitte says. With the supply ballooning and the rising cost of capital, identifying new warehousing models, retrofitting spaces, and developing smarter facilities will have to be a priority.  

Alternative Sectors 

Specialty sectors, including data centers, self-storage, life sciences facilities, seniors housing, medical offices, and student housing, have been particularly popular for commercial real estate investors over the past years. The same will be true for the years ahead. 

The increased demand and favorable economic conditions over the past decade have led to a bigger supply of new specialty products. Most of this property has been absorbed, so the new supply has still offered good investment opportunities. But now a few specialty sectors are oversupplied, which means investors will have to pause in 2020. 

The two sectors where oversupply is most evident are senior housing and self-storage. Over construction of self-storage facilities has led to modest rent declines in many markets in 2019. Senior housing construction has also slowed over the past couple of years, but not enough for occupancy to follow. The sector had lower occupancy than usual and a modest rent growth in 2019.

Office 

Office construction has been low compared to previous cycles, so some indications of overbuilding are present.

Retail

The biggest issue for retail would be a limited demand and store closures, rather than overbuilding.  Filling vacant retail and adapting to a “reuse” of the space will be the biggest issues regarding the supply chain. 

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