April 2024 Commercial Real Estate Market Insights

The commercial real estate (CRE) market has seen few changes during the year’s first quarter. Vacancy rates were on the rise, and rent growth continued to decelerate across all market sectors. Specifically, the office vacancy rate reached new record highs, reaching almost 14%, while fundamentals in both the retail and industrial sectors decelerated. These trends reflect the persistent trends and challenges from the previous year that continue to influence the market.

Interest rates remain steady at 5.5%, and the effects of hybrid work impact on office spaces are factors that are not going away overnight. In the meantime, the U.S. economy started to slow down after previously exceeding expectations. Nonetheless, consumers continue to spend, helping to keep the economy resilient.

Office Properties

Activity in the office sector dropped further in the first three months of the year. While office availability and delinquencies rose during this period, construction levels remained nearly unchanged. This further increased the office vacancy rate, reaching a new high of 13.7% in March. Specifically, there is more than double the amount of unoccupied office square footage compared to a year ago. Looking ahead, the forecast suggests a persistent increase in available office spaces. Leasing activity, which helps to gauge the level of demand and interest from potential tenants, is about 30 percentage points below the pre-pandemic levels.

Bar graph: Net absorption in square feet of office properties by quarter, Q1 2021 to Q1 2024

Multifamily Properties

On the other hand, persistently high mortgage rates, hovering around 7%, have spurred demand for apartment buildings. The multifamily sector not only rebounded from the lows it experienced last year but also saw net absorption in the first quarter of this year, which more than doubled the activity of the same period a year ago. However, despite the stronger demand, the vacancy rate increased to 7.8% in March. This rise is mainly due to the influx of new housing supply, which has absorbed the increased demand and prevented vacancy rates from decreasing.

Table: Top 10 areas with the strongest 12-month multifamily absorption, Q1 2024 and 2023

Retail Properties

Demand for retail spaces fell below pre-pandemic levels during the first quarter. Over the past year, net absorption has significantly decreased, dropping by approximately 30 percentage points. But, despite these lower absorption rates, the limited availability of retail spaces has kept vacancy rates low, hovering around 4%, the lowest rate among any other sector in the commercial real estate market. In the meantime, the fundamentals of this sector will remain solid in 2024 as new construction deliveries are likely to diminish. This reduction in new supply can lead to tighter market conditions, potentially supporting rental rates and occupancy levels, essential components of the commercial real estate sector.

Table: 12-month net absorption by retail type Q1 2016, 2020, and 2024

Industrial Properties

Respectively, the industrial sector has also slowed during the first quarter of the year, with net absorption falling to levels not seen in over a decade. While online shopping and e-commerce pushed activity to record high levels at the end of 2021 and beginning of 2022, net absorption is currently nearly 66% lower than a year ago and 45% below the pre-pandemic level. Nevertheless, rent growth continued to be the fastest among any other sector of the commercial real estate market. Specifically, rents for industrial spaces are 5.3% higher than a year ago. The outlook for the industrial real estate market remains positive, driven by factors such as the lasting impact of e-commerce and robust construction spending.

Table: Top 10 areas with the strongest 12-month industrial absorption rate in Q1 2024 and 2023

Hotel Properties

At the outset of 2024, the hospitality industry has shown signs of progress. The hotel industry is nearing a full recovery, with occupancy rates now just 0.6% below pre-pandemic levels. Moreover, average daily rates (ADR) and revenue per available room (RevPAR) are now surpassing those seen before the pandemic struck.

Bar graph: 12-month hotel occupancy rate in March 2020, 2021, 2022, 2023, and 2024

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