Net operating income among commercial real estate owners reporting year-end 2014 financials showed strong growth in 2014, according to a new report from Wells Fargo Securities.
Net operating income (NOI) increased 2.8% on average for the year, Wells Fargo said, in comparison to 2013’s increase of 2.64%.
The company based its conclusion on NOIs posted by properties collateralizing loans in conduit CMBS transactions, with more than 50% of those properties having now reported full-year 2014 financials. If the reported growth rate holds steady among properties that have not yet reported, the 2014 NOI growth would stand as the second highest in commercial real estate since the recession, behind only 2012’s NOI jump of 3.43%, Wells Fargo said.
The steady growth in property NOI also is improving collateral performance in the CMBS arena., Wells Fargo said. Both term defaults and maturity defaults dropped significantly in 2014 and remain low to-date in 2015.
By property type, hotel properties recorded the strongest year-over-year growth at 11.93% in 2014, up from 2013’s 7.67% and 2012’s 9.12%, Wells Fargo said. The CoStar Commercial Repeat Sale Indices (CCRSI) noted that hotel property prices rebounded in 2014, while CoStar’s Hospitality Index soared by 17.7% in 2014 after basically flat growth of 0.6% in 2013. National hotel occupancies hit their highest level since the mid-1990s, triggering room rate increases, RevPAR growth, and investor demand. Conversely, office properties, such as Philly office space, have shown the lowest NOI growth for 2014, at just 1.12%, up about one-tenth of a percentage point from 2013 and 2012. CoStar’s CCRSI noted that with investor interest on the rise in both core and non-primary markets, pricing in the Office Index grew 9.5% in 2014, while the Prime Office Metros Index strengthened by 9.2% in 2014. Overall office market fundamentals showed significant improvement for the year with office vacancies dropping to 11.3%, from 11.9% the year prior.
Multifamily properties posted continued but moderate increases in NOI growth, rising 4.29% in 2014, from 4.97% in 2013 and 5.82% in 2012, Wells Fargo said. CoStar noted that multifamily values exceeded their previous peak in 2014 and that multifamily pricing continued to grow, up 11.7% in 2014.
In the industrial property sector, NOI growth for 2014 was up slightly, posting a 2.4% increase compared to 2.2% in 2013, but still down from 2012’s 2.9%. However, within the industrial sector, self-storage properties recorded the second-highest NOI growth at 7.2%. CoStar noted that industrial property prices grew by a strong 11.9% in 2014. Vacancy rates declined to 6.8% for the year, 80 basis points below the 2007 cyclical low of 7.6%. Meanwhile, construction brought only 106 million square feet to the sector in 2014, significantly lower than the 159 million square feet of net absorption. Spurred by low vacancies and a relative lack of supply, industrial rent growth was up 4.3% in 2014 — the strongest of the four main property types.
With the properties that have reported 2014 financials so far, NOI growth rate for retail properties, including Philly retail space, dropped in 2014 to 1.82%, just below the 1.94% recorded in 2013, Wells Fargo said. However, CoStar’s Retail Index recorded the biggest increases in 2014. Fueled by pricing increases in response to improving market fundamentals, the overall Retail Index was up 13.9% for the year — the largest gain among the four major property types. Gains were concentrated in the core coastal markets in 2014. With little development activity, retail demand surpassed supply by two-to-one for the year, causing vacancies to fall 20 basis points to 6.3% in fourth quarter 2014 — the lowest rate in more than six years. Annual rent growth was stable at nearly 3%.
For more information about Philly office space, Philly retail space or other Philadelphia commercial properties, please call 215-799-6900 to speak to Jason Wolf (215-588-8800-cell; jason.wolf@wolfcre.com), Leor Hemo (215-514-1750-cell; leor.hemo@wolfcre.com) or Lee Fein (215-206-5580-cell; lee.fein@wolfcre.com) at Wolf Commercial Real Estate, a premier Philadelphia commercial real estate brokerage firm with expertise in Philadelphia office space and Philadelphia retail space.
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