Commercial real estate started the new year on a slow note with lower demand, smaller rent price gains, and higher vacancy rates. Office and multifamily are the two sectors that face additional headwinds this year. In these two sectors, vacancy rates are more than 0.8 percentage points higher than a year ago. Net absorption – another indicator of demand – was significantly lower in January compared to a year ago in all four main sectors of Commercial Real Estate. In fact, office space net absorption went back to negative territory. This means that more office space was vacated/available in the market than what was leased or absorbed by commercial tenants.
Here is how each commercial real estate sector performed in January 2023.
After its recent record-breaking year in 2021, the multifamily sector continues to slow down. With net absorption down 80% from a year ago, the vacancy rate rose to 6.8% from 5.0% the previous year. As a result, rent growth dropped by more than 8 percentage points within a year to its lowest level since the beginning of 2021. However, the multifamily sector will continue to perform better than pre-pandemic due to favorable demographics and a strong job market that encourages household formation.
Although many employers are requiring employees to return to the office and remote jobs are fading, the office sector continues to struggle. Demand for office space declined in the first month of the year, returning to negative territory. With more office spaces vacant and available than leased, the vacancy rate rose to 12.8% from 12.0%. The future of office space is ambiguous. COVID-19 has disrupted the idea of the “traditional office” work environment. Hybrid work is now a reality for many people.
Demand for industrial space has slowed down, but it's still stronger than pre-pandemic. Net absorption is more than 50% higher than it was at the beginning of 2019. Although the vacancy rate has increased by 6 percentage points within the last year, rent growth continues to increase by a double-digit number due to low supply in this sector. Data shows that the industrial sector will continue to be one of the bright spots of commercial real estate in 2023.
The retail sector was the commercial real estate sector with the lowest vacancy rate in January 2023. While consumers keep spending despite higher costs, this sector continues to perform better than pre-pandemic. With inflation moving down further and interest rates to stabilize later this year, demand for retail space will remain strong.
Hotel revenue continued to increase in January. After dipping in 2020 due to the COVID-19 travel restrictions and self-quarantine orders, the hospitality sector has experienced significant gains. In fact, the revenue per available room (RevPAR) is more than 10% higher than the pre-pandemic level. With business and leisure time increasing, the demand for hospitality spaces will continue to grow in 2023.