February 2024 Commercial Real Estate Market Insights

While the U.S. economy remains resilient, the commercial real estate market’s performance during the first month of 2024 shows a nuanced landscape with sector–specific challenges and opportunities. The normalization of hybrid working arrangements continues to negatively impact office demand, increasing the market's unoccupied office spaces. However, the fundamentals of the multifamily, retail, and industrial sectors remain robust, indicating a varied performance across the CRE market.

Below is a summary of the performance across various commercial real estate sectors at the outset of 2024.

Multifamily Properties

Mortgage rates remaining near 7% are strengthening the demand for apartment buildings. This trend stems from the fact that higher mortgage rates make home buying less accessible for many, leading people to seek rental options instead, thereby increasing the demand for rental apartments. The past year has seen a 120% jump in net absorption relative to the year before. Nevertheless, the effect is not visible in the vacancy rates due to the increased number of apartment units completed and delivered to the market. An influx of new housing supply could absorb the stronger demand, keeping the vacancy rates from declining. Specifically, the multifamily sector's vacancy rate was 7.6% in the first month of the year.

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

Office Properties

The amount of unoccupied office space continues to rise, pushing the vacancy rate further up to 13.7%. Specifically, there are twice as many unoccupied office square feet as occupied compared to a year ago. With many businesses reevaluating their need for physical office space, vacancy rates will continue to increase in this sector, especially in the urban centers. However, the anticipated lower inflation and interest rates later this year may make rehabilitation or conversion of underperforming office buildings more viable.

Bar graph: 12-month office net absorption in square feet, Q1 2021 to Q1 2024

Industrial & Warehouse Properties

The industrial sector continues to maintain its health, but there are emerging signs of a slowdown, with net absorption falling beneath levels seen before the pandemic. While online shopping and e-commerce pushed up the activity to record high levels at the end of 2021 and the beginning of 2022, net absorption is currently nearly 70% lower than a year ago. Nevertheless, rent growth continues to be the fastest among any other sector of the commercial real estate market. Specifically, rents for industrial spaces are nearly 6% higher than a year ago. The long-term outlook for the industrial real estate market remains positive, buoyed by factors such as the lasting impact of e-commerce and increased construction spending.

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

Retail Properties

At the onset of 2024, the retail sector has experienced a slowdown in demand. Compared to the early months of 2023, net absorption has seen a significant reduction, falling by approximately 30 percentage points. Despite lower absorption rates, the scarcity of retail spaces has contributed to maintaining low vacancy rates, which hover around 4%. With fewer new construction deliveries, the fundamentals of this sector will remain solid in 2024. When new supply is constrained, it can lead to tighter market conditions, potentially supporting rental rates and occupancy levels, key components of the commercial real estate sector.

Table: Net retail absorption by type, Q1 2016, 2020, and 2024

Hotel Properties

The hospitality sector continued to advance at the beginning of 2024. Yet, despite gains in average daily rates and revenue per available room, hotel occupancy hasn't fully recovered to the figures seen before the pandemic. The 12-month occupancy rate is still lagging by 2.9% behind the pre-pandemic benchmark.

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