Cover of the March 2024 Commercial Real Estate Market Insights report

During the second month of the year, the Commercial Real Estate (CRE) market presented a mixed picture, with certain sectors showing resilience while others continued to face uncertainties and losses. The office sector has unquestionably borne the brunt of the most severe and persistent challenges than any other CRE category, and its outlook remains uncertain. The industrial sector has slowed down, with demand falling beneath levels seen before the pandemic. However, multifamily and neighborhood retail sectors remain strong. In the meantime, lower interest rates later this year are expected to create a more favorable environment for the CRE market by reducing costs, increasing demand, and stimulating economic activity.

Multifamily Properties

The multifamily sector is progressively rebounding from the lows it experienced last year. Net absorption has surged 120% compared to a year earlier. Persistently elevated mortgage rates, hovering around 7%, continue to boost the demand for apartment buildings. But, despite stronger demand, the vacancy rate increased further in February to 7.7%. The influx of new housing supply to the market has absorbed the stronger demand, preventing vacancy rates from falling.

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

Office Properties

Troubles continue in the office sector. Leasing activity has dropped, office availability and delinquencies have increased, but construction remains nearly at the same levels. As a result, the office vacancy rate reached a new record high last month at 13.8%. Specifically, there are more than twice as many more unoccupied office square feet than occupied compared to a year ago. Looking ahead, the forecast suggests an increase in available office spaces. Leasing activity, which helps to gauge the level of demand and interest from potential tenants, has dropped about 50 percentage points below the pre-pandemic levels.

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

Industrial & Warehouse Properties

In the industrial sector, there are emerging signs of a slowdown, with net absorption falling to levels lower than any seen in the past decade. While online shopping and e-commerce pushed up the activity to record high levels at the end of 2021 and beginning of 2022, net absorption is currently nearly 70% lower than a year ago and 35% below the pre-pandemic level. Nevertheless, rent growth continues to be the fastest among any other sector of the commercial real estate market. Specifically, rents for industrial spaces are 5.5% higher than a year ago. The long-term 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, Q1 2024 and Q1 2023

Retail Properties

Demand for retail spaces continues to slow down. Compared to the early months of 2023, net absorption has seen a significant reduction, falling by approximately 30 percentage points. But, despite lower absorption rates, the limited availability of retail spaces maintains vacancy rates low, hovering around 4%, the lowest rate among any other sector in the commercial real estate market. With fewer new construction deliveries expected, 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, which are key components of the commercial real estate sector.

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

Hotel Properties

The hospitality industry has shown signs of progress at the beginning of 2024. However, hotel occupancy levels have yet to return to pre-pandemic norms, even with the improvement in average daily rates and revenue per available room. Over the past year, the occupancy rate has remained 3.2 percent lower than the levels seen before the pandemic's impact.

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

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