The commercial real estate market continued to see rising occupancy, rents, and investor acquisitions in February 2022, with the impact of the Russia-Ukraine war and upswing in interest rates still likely to manifest in the coming months in some commercial segments. In the apartment market, 571,669 units were absorbed in the past 12 months through March 26, outpacing the 404,152 units delivered into the market (supply). The vacancy rate remain at a low 5%, pushing asking rents up 11% year-over-year on average.
With more workers heading back to the office and amid sustained job growth, 22.1 million square feet (MSF) of office space absorbed since 2021 Q3. However, occupancy is still dow by 115 MSF compared to the pre-pandemic level, pushing up the vacancy rate to 12.3%. Asking rents are up on average by 0.7% year-over-year, with rents up in nearly all 390 metro areas except in markets like New York, San Francisco, and Washington DC.
In the industrial market, 778 MSF of industrial space has been absorbed since 2020 Q2. The industrial sector has the lowest vacancy rate among the core property markets, at 4.1%, driving up rent growth to 10.6% year-over-year.
In the retail property market, 74 MSF of retail space has been absorbed since 2020 Q2, with strong demand for retail space in general retail, power centers, and strip malls. The averag vacancy rate is a low of 4.5%, with asking rents up 4% year-over-year.
While the hotel property market has improved compared to one year ago, the emergence of the Omicron variant in November stalled the hotel property market’s recovery. Hotel occupancy was just at 52.2% in February, which is still below the occupancy of 56.9% before the pandemic in February 2020.
The low vacancy rates except in the office market suggest commercial prices are likely to remain broadly firm even as interest rates rise. Moreover, oil-producing states like Texas, North Dakota, New Mexico Colorado, Oklahoma, and Michigan could see higher demand for commercial space as the U.S. ramps up oil and electric vehicle production.
Rising mortgage rates will tend to shift the demand toward multifamily rentals. The relatively short-term leases in the apartment market create a natural hedge to inflation that makes multifamily properties a good investment in a rising interest rate environment.
As vaccinations increase and the population achieves natural immunity, workers will likely continue to return to the office even if on a hybrid model, bolstering the demand for office space.
The demand for industrial warehouse space is likely to moderate temporarily if consumer spending weakens as inflation erodes purchasing power. However, prices are likely to remain firm due to strong long-term demand underpinned by sustained growth in e-commerce.
Neighborhood centers and general retail stores that provide essential services and consumer items (e.g. groceries) are likely to see sustained demand from occupiers while retail malls―which already have an elevated vacancy rate of 8% ―are the most vulnerable to price declines as consumers pull back on non-essential spending as purchasing power weakens.