While the U.S. economy remains resilient, commercial real estate market performance through the first month of 2024 presents a nuanced picture with sector-specific challenges and opportunities. The normalization of hybrid work styles continues to negatively impact office demand, leading to an increase in vacant office space on the market. However, fundamentals in the multifamily, retail and industrial sectors remain strong, illustrating the variability in performance across the CRE market.
Below is an overview of how different commercial real estate sectors are performing at the start of 2024.
housing complex
With mortgage rates hovering near 7%, the demand for apartments is on the rise. This trend is attributed to the fact that rising mortgage rates have made home buying unaffordable for many, leading them to look for rental properties instead, increasing the demand for rental apartments. Over the past year, net absorption has increased by 120% year-on-year. However, this impact is not seen in the vacancy rate, as the number of apartments completed and delivered to the market has increased. The influx of new housing supply is likely to absorb the strong demand and limit the decline in the vacancy rate. Specifically, the vacancy rate in the apartment sector in the first month of the year was 7.6%.
Office Property
The amount of vacant office space continues to grow, with the vacancy rate rising further to 13.7%. Specifically, there is twice as much vacant office space as occupied space compared to a year ago. As many companies reevaluate their need for physical office space, vacancy rates will continue to rise in this sector, especially in urban centers. However, lower inflation and interest rates expected later this year could make renovating or converting underperforming office buildings more viable.
Industrial and Warehouse Properties
The industrial sector remains healthy but is showing signs of slowing, with net absorption below pre-pandemic levels. While online shopping and e-commerce drove activity to record levels in late 2021 and early 2022, net absorption is currently about 70% lower than a year ago. That said, rental growth continues to outpace any other sector of the commercial real estate market. Specifically, rents for industrial space are about 6% higher than a year ago. The longer-term outlook for the industrial real estate market remains positive, supported by factors such as the sustained impact of e-commerce and rising construction spending.
Retail Real Estate
At the start of 2024, demand in the retail sector is slowing. Compared to the start of 2023, net absorption is down by around 30 percentage points, a significant decline. Despite the decline in absorption, vacancy rates remain around 4% due to a shortage of retail space. As new property deliveries decline, fundamentals for the sector will remain strong in 2024. Limited new supply could lead to tighter market conditions, weakening rents and occupancy rates, key components of the commercial real estate sector.
Hotel Properties
The hospitality sector continues to see growth in early 2024. However, despite increases in average room rates and revenue per room, hotel occupancy rates have not fully recovered to pre-pandemic figures. 12-month occupancy rates are still 2.9% below the pre-pandemic benchmark.