Commercial Real Estate Market Analysis

office space commercial real estate morgenstern team

Update August 2023

While recent economic and market indicators present a mixed picture, the commercial real estate sector exhibited a slowdown in July. Notably, interest rates increased at their swiftest rate in decades, albeit with a drop in inflation to 3.2%. Concurrently, the Federal Reserve’s July Senior Loan Officer Opinion Survey reported that banks have tightened standards and witnessed weaker demand across all commercial real estate loan categories. The recent credit downgrade in the United States may further complicate obtaining commercial real estate loans.

Recent data in the commercial real estate sector indicate an increasing availability of properties for lease. With the exception of the retail sector, vacancy rates have risen compared to the previous year in the office, multifamily, and industrial segments. The office sector has experienced nearly a year of negative net absorption, with the number of available spaces for lease continuing to grow. In the multifamily sector, rental costs are rising at a more moderate pace due to the completion of a record number of apartment buildings under construction. The industrial sector, driven by e-commerce, may stabilize as net absorption approaches pre-pandemic levels, although industrial rental costs have increased by over 7% compared to a year ago. The retail sector remains robust, with a vacancy rate lower than the previous year and the pre-pandemic level, despite e-commerce accounting for 15% of total sales.

Here’s a breakdown of each commercial real estate sector’s performance in July 2023:

  1. Multifamily Sector: The multifamily sector has seen a substantial increase in delivered units over the past 12 months, resulting in a 27% rise in vacancy rates compared to the previous year. However, absorption has been on the rise in July, increasing by 7% compared to the previous year. Favorable demographics, a strong job market, and reduced housing affordability due to higher mortgage rates are expected to keep the multifamily sector strong compared to other commercial real estate sectors.
  2. Office Sector: Despite the conclusion of the pandemic, the return to office spaces has been sluggish. Office space deliveries remain above the ten-year average, and factors such as remote technology advancements and flexible workspaces have led to 58 million more vacant square feet than occupied square feet over the past 12 months, resulting in a record-high office vacancy rate of 13.5%. The increasing construction of new office spaces and ongoing technological advancements present challenges for the office sector as it adapts to evolving work arrangements and needs.
  3. Industrial Sector: While the industrial sector has slowed from its record high in the previous year, it has returned to pre-pandemic levels. Net absorption is nearly 40% lower than the previous year, and additional industrial spaces have entered the market, contributing to a 5.4% industrial vacancy rate and moderating rent growth to 7.2%. However, rental costs for industrial spaces continue to rise faster than in the pre-pandemic era.
  4. Retail Sector: The traditional retail sector has faced challenges due to the rise of e-commerce, a trend that was further exacerbated by the pandemic. However, the retail sector has demonstrated resilience post-pandemic. The vacancy rate has remained steady at 4.2% for the last four quarters, the lowest among all commercial real estate sectors. With inflation easing and anticipated stabilization of interest rates later in the year, demand for retail space is expected to remain robust.
  5. Hospitality Sector: The hotel sector has experienced a surge in demand, resulting in increased occupancy rates and higher room rates. Hospitality has made a notable recovery, with a boost in hotel revenue after being previously impacted by COVID-19 restrictions and quarantine protocols. Revenue per available room (RevPAR) is now more than 13% higher than its pre-pandemic level. As both business and leisure travel regain momentum, the demand for hospitality spaces is expected to continue its upward trajectory throughout 2023.

Data Source by: Oleh Sorokin Analyst of Commercial Real Estate Research – National Association of REALTORS®