June 2024 Commercial Real Estate Market Insights

The Commercial real estate (CRE) market continued to experience the same trends in May: office vacancy rates remained at a record high of nearly 14%, fundamentals for both retail and industrial sectors weakened, and demand for apartment buildings grew further due to low affordability. However, there are signs that demand for office space has likely already seen the bottom.

Office Sector

Net absorption for the office sector remains negative, with more vacant spaces than occupied. However, data indicates that the gap between vacated and occupied spaces is narrowing. As of May 2024, nearly 49 million square feet of office space were vacated more than leased, down from 57 million square feet in the first quarter and 59 million square feet at the end of the previous year. Although there may be a slight increase in demand for office space in 2024, the outlook suggests that net absorption for this sector will remain in negative territory. Leasing activity, an indicator of demand and interest from potential tenants, is currently near pandemic levels and about 40 percentage points below pre-pandemic levels.

Bar graph: 12-Month Net Office Absorption in Square Feet, Q1 2021 to Q2 2024

Multifamily Sector

Conversely, the multifamily sector continues to gain momentum with mortgage rates remaining near 7%. Net absorption is 2.5 times higher than a year ago, with an additional 265,000 more multifamily units leased than vacated. Even though a rising number of multifamily units are delivered in the market, the vacancy rate slightly eased in May to 7.7% due to this strong demand. In fact, the multifamily vacancy rate declined for the first time since Q3 2021.

Table: Top 10 Areas With Fastest Rent Growth, Q2 2024 and Q2 2023

Retail Sector

The retail sector continues to have the tightest availability conditions in the commercial real estate market. Only 4.7% of retail space is currently available for lease, the lowest level on record. Due to limited availability, the vacancy rate is still near 4%, even though net absorption has slowed down further in May. Specifically, in the last 12 months, demand for retail spaces has increased by nearly 39 million square feet compared to 57 million square feet a year earlier. With new construction deliveries diminishing further, the fundamentals of this sector are expected to remain tight in 2024.

Line graph: 12-Month Net Retail Absorption by Type, Q1 2014 to Q2 2024

Industrial Sector

Fundamentals for the industrial sector have further weakened in May. Net absorption has fallen to levels not seen in over a decade. After reaching record-high levels at the end of 2021 and the beginning of 2022, driven by the demand for warehouse space to support online shopping and e-commerce, net absorption is currently 68% lower than a year ago and 60% below the pre-pandemic average level. The outlook suggests further softening in this sector. High borrowing costs have shifted consumer spending away from goods towards services, which can impact the demand for industrial spaces in the coming months.

Table: Top 10 Areas With the Strongest 12-Month Industrial Absorption, Q2 2024 and Q2 2023

Hotel Sector

As 2024 continues, the hospitality sector is seeing improvements. Hotel occupancy rates have leveled off at around 63%, remaining roughly 3% below pre-pandemic figures, which suggests that a complete recovery may be elusive due to the prevalence of remote work. Nevertheless, average daily rates and revenue per available room have now exceeded pre-pandemic benchmarks.

Bar graph: 12-month Hotel Occupancy Rate, May 2019, 2020, 2021, 2022, 2023, and 2024

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