The commercial real estate (CRE) market entered the second quarter of the year with continued rising vacancy rates and slowing rental growth across most market sectors. Specifically, office vacancy rates hit an all-time high, reaching nearly 14%, while fundamentals in the retail and industrial sectors slowed. High interest rates and the impact of hybrid work on office space remain the main factors holding back the sector. Meanwhile, the U.S. economy, which had previously outperformed expectations, has begun to slow, reflecting the impact of inflationary pressures on consumers.
Office Property
At the beginning of the second quarter of this year, vacant office space fell below occupied office space for the first time since the end of 2022. This is the first time that vacant office space exceeds occupied office space, and net absorption remains negative, but the gap between vacant and occupied office space has narrowed. However, the vacancy rate rose further in April 2024 to 13.8%. Looking forward, a continued increase in available office space is forecast. 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, mortgage rates remain around 7% and demand for apartments remains strong. Not only has the multifamily sector recovered from last year's lows, but net absorption is more than double what it was in the same period last year. This means that compared to April last year, there are more than twice as many occupied rental units as vacant units. However, despite this robust demand, the vacancy rate remains at 7.8%. This is mainly due to the supply of new rental housing that has flooded into the market after apartment construction over the past few years reached record high levels. The completion of these additional rental units is absorbing the growing demand and preventing the vacancy rate from declining.
Retail Real Estate
Demand for retail space remains below pre-pandemic levels as net absorption slowed further in April. Compared to a year ago, net absorption is down significantly by around 30 percentage points. However, limited supply of retail space has kept vacancy rates low, hovering around 4%, lower than any other sector of the commercial real estate market. As new property deliveries are likely to decline further, fundamentals for the sector are expected to remain strong in 2024.
Industrial Real Estate
The industrial sector has not been spared the effects, with demand for industrial space also slowing. Net absorption has fallen to levels not seen in over a decade. After reaching record levels in late 2021 and early 2022, driven by the need for warehouse space to accommodate online shopping and e-commerce demand, net absorption is now down 63% year-on-year and 52% below pre-pandemic average levels. However, the sector continues to experience the fastest rental growth compared to any other sector of the commercial real estate market. Specifically, rents for industrial space are up 4.7% year-on-year. The outlook for the industrial real estate market remains bright, driven by factors such as the sustained impact of e-commerce and robust construction spending.
Hotel Properties
As 2024 progresses, the hospitality industry is seeing improvement. Hotel occupancy rates have stabilized at around 63%, but are still about 3% below pre-pandemic levels. This suggests that a full recovery may be difficult due to the rise of remote work tools such as Zoom. However, average daily rate (ADR) and revenue per room (RevPAR) are now above pre-pandemic levels.
Download the full report