The commercial real estate (CRE) market was largely unchanged in the first quarter of the year. Vacancy rates are trending upward and rent growth continues to slow across all market sectors. Specifically, office vacancy rates hit an all-time high, reaching nearly 14%, and fundamentals in both the retail and industrial sectors slowed. These trends reflect ongoing trends and challenges from the prior year that continue to impact the market.
Interest rates are stable at 5.5% and the impact of hybrid working on office space is not going to disappear overnight. Meanwhile, the US economy has started to slow after growing faster than initially expected. Still, consumers continue to spend, helping keep the economy resilient.
Office Property
Activity in the office sector further declined in the first three months of the year. During this period, office availability and backlogs increased, while construction levels remained roughly flat. This led to a further increase in the office vacancy rate, which reached a record high of 13.7% in March. Specifically, there is now more than double the amount of vacant office space compared to a year ago. Looking ahead, available office space is forecast to continue to increase. Leasing activity, which helps gauge the level of demand and interest from potential tenants, remains about 30 percentage points below pre-pandemic levels.
housing complex
Meanwhile, high mortgage interest rates, hovering around 7%, are stimulating demand for apartments. The apartment sector has not only recovered from last year's lows, but also saw an increase in net absorption in the first quarter of this year, more than double the same period last year. However, despite the increased demand, the vacancy rate rose to 7.8% in March. This increase is mainly due to the influx of new housing supply, which is absorbing the increased demand and preventing the vacancy rate from falling.
Retail Real Estate
Demand for retail space fell below pre-pandemic levels in the first quarter. Over the past year, net absorption has declined significantly, dropping by around 30 percentage points. However, despite the decline in absorption, the limited supply of retail space has kept vacancy rates low, hovering around 4%, lower than any other sector in the commercial real estate market. Meanwhile, fundamentals for the sector will remain strong in 2024 as new property deliveries are likely to decline. This decline in new supply could lead to tighter market conditions, leading to lower rents and occupancy rates, key factors in the commercial real estate sector.
Industrial Real Estate
The industrial sector also slowed in the first quarter of the year, with net absorption falling to levels not seen in more than a decade. While online shopping and e-commerce drove activity to record levels in late 2021 and early 2022, net absorption is currently down about 66% compared to a year ago and 45% below pre-pandemic levels. That said, rental growth continues to outpace any other sector of the commercial real estate market. Specifically, rents for industrial space are up 5.3% compared to a year ago. The outlook for the industrial real estate market remains positive, driven by factors such as the sustained impact of e-commerce and robust construction spending.
Hotel Properties
As 2024 begins, the hospitality industry is showing signs of progress. The hotel industry is close to a full recovery, with occupancy rates currently just 0.6% below pre-pandemic levels. Additionally, average daily rate (ADR) and revenue per room (RevPAR) are both above pre-pandemic levels.
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