In most core and secondary U.S. real estate markets, new development and leasing activity growth is slowing due to factors like stock market volatility, uncertain interest rates with a slightly inverted yield curve, the waning impact of tax cuts, rising wages, labor supply shortage, and fatigue after a record-setting period of economic expansion. Globally, economies have stagnated in Europe and even China is showing signs of slowing.
One factor is companies seeking new locations. We see this with Amazon and Apple expansions that impact Northern Virginia, Nashville, and Austin, Texas. The massive growth effects here will be localized to areas where there is large company and government growth. We expect to see some growth in the Black Hills area with the new B21 bomber moving to Ellsworth AFB.
Another factor are companies moving from higher tax and regulated states to those where it is more affordable to live and easier to operate. McKesson Corp. recently announced it was moving its headquarters from San Francisco to Dallas. The company cited low taxes, affordable housing, good schools, and a business-friendly environment as reasons for the move. With the new tax laws in place, residents of high tax states like New York, California, and Massachusetts are considering relocating to states like Texas, Florida, Tennessee, and the Carolinas where taxes are lower. Since as a country we are at full employment and have the lowest unemployment in two decades, companies may select areas where it is easier to retain employees. Low taxes and regulations and good community amenities are factors.
When considering various sectors of commercial real estate, industrial, senior housing, and manufactured housing are going strong. Most of the primary industrial markets in the U.S. have vacancy rates under 5%. In all the port cities and large metros like Atlanta, vacancies are under 2%. Low vacancy rates are driven by a revitalizing of manufacturing and consumer spending and e-commerce. Retailers reported e-commerce sales jumped 26.4% around the 2018 Thanksgiving holiday compared to the previous year. As e-commerce continues to grow, strong demand in industrial will come from the need to warehouse products.
Multifamily and hospitality are seeing rising construction costs. Currently, some of these are hitting 12% annually. Office markets are mostly flat nationally with some markets like Houston, New York, and San Francisco as exceptions. Companies that are adding office related jobs are also shrinking space needs per person. Work benches, open cubicles, creative spaces, and in some cases the ability to work remotely using a VPN network are all lessening the office demand space per person.
Nationally, retail development has stopped. Malls are experiencing large vacancy rates and bankruptcies. In recent years hundreds of malls have closed as major retailers have closed with a combination of changing purchase habits and high debt loads. Some retail areas that are doing well are smaller neighborhood, food-anchored shopping centers, home improvement stores, furnishings, and off-price stores like TJ Maxx and Ross Dress for Less.
Self-storage real estate sector rebounded in 2013 and is breaking record valuations in 2015. This type of property is seeing strong demand among lenders with a new national increase of 8.7% over existing supply according to MJ Partners Real Estate. Some areas are seeing double digit increases so there may be some concern with overbuilding.
Some secondary and tertiary markets are seeing strong growth. Salt Lake City, Orlando, and Central areas in Florida and Wisconsin are all strong demand with interest that has not been seen in years. So as the old adage for success in real estate is based on location, location, location continues to be true. Other factors, as they always do, impacting commercial real estate, are the availability of equity and debt capital, and inflation of material prices. A new issue this year is if the accounting regulation changes for handling of leases will have an impact on demand.
The lender and investor should understand the current forces in the market nationally but really needs to understand the local trends in his own area.