The commercial real estate (CRE) market continued on the same path in May, with office vacancy rates remaining near a record 14%, weakening fundamentals in the retail and industrial sectors, and low home prices driving further demand for apartments. However, there are signs that demand for office space may have already bottomed out.
Office Department
Net absorption in the office sector remains negative, with vacant space exceeding occupied space. However, data shows that the gap between vacant and occupied space is narrowing. As of May 2024, about 49 million square feet of office space exceeded leased space, down from 57 million square feet in the first quarter and 59 million square feet at the end of the previous year. Demand for office space may increase slightly in 2024, but outlooks suggest that net absorption in the sector will remain in negative territory. Leasing activity, an indicator of demand and interest from potential tenants, is currently near pandemic levels and about 40 percentage points below pre-pandemic levels.
Apartment Sector
In contrast, the multifamily sector continues to gain momentum as mortgage rates remain near 7%. Net absorption is 2.5 times higher than a year ago, with 265,000 more multifamily units rented than available. This strong demand has caused the vacancy rate to moderate slightly to 7.7% in May, despite an increasing number of multifamily units being supplied to the market. In fact, the multifamily vacancy rate fell for the first time since the third quarter of 2021.
Retail Sector
The retail sector continues to face the toughest supply conditions in the commercial real estate market. Only 4.7% of retail space is currently available for lease, the lowest level on record. Limited supply has resulted in vacancy rates still near 4%, despite a further slowdown in net absorption in May. Specifically, over the past 12 months, demand for retail space has increased by nearly 39 million square feet, down from 57 million square feet a year ago. With new construction supply further declining, fundamentals for the sector are expected to remain challenging in 2024.
Industrial Sector
Industrial sector fundamentals weakened further in May. Net absorption fell to levels not seen in more than a decade. After reaching record levels in late 2021 and early 2022, driven by demand for warehouse space to support online shopping and e-commerce, net absorption is now 68% lower than a year ago and 60% below pre-pandemic average levels. The outlook suggests further softening for the sector. Higher borrowing costs are shifting consumer spending from goods to services, which could impact demand for industrial space in the coming months.
Hotel Category
As 2024 progresses, the hospitality sector is showing improvement. Hotel occupancy rates are plateauing at around 63%, about 3% below pre-pandemic figures, suggesting a full recovery may be difficult due to the prevalence of remote work. However, average daily rates and revenue per room are rising above pre-pandemic benchmarks.
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