After the strong rebound for the U.S. economy in 2021, growth in 2022 has slowed in the face of rising inflation, the household incomes squeeze, and geopolitical events. While the economy continues to deal with elevated inflation, there is a slowdown in the growth of commercial real estate.
There has been a gradual deceleration of rent prices. Rents grew 5.7% year-over-year in Q3 2022 compared to 9.4% and 11.3% in the previous two quarters. However government data shows that rent growth is accelerating. Why don’t private and government data align?
The Consumer Price Index (CPI), which provides information about rent inflation, uses data from the Consumer Expenditure Survey (CES) to determine the level of prices for goods and services. While this is a survey, most renters report the rent they have locked in earlier. This means that rent changes may take months to be reflected in government data. In contrast, the private sector publishes the listed rents – current rent prices. Thus, government data will likely show a decelerating trend in rent prices after several months.
Although more people are returning to their offices, the office sector continues to struggle. In August 2022, 6.5% of employed persons teleworked because of the coronavirus pandemic, down from 7.1% in the prior month. However, after four quarters with positive net absorption, demand for office space dropped as net absorption turned negative again. As a result, more office spaces are vacant as the vacancy rate rose to 12.4% in Q3 2022 from 12.1% a year earlier.
The industrial sector continued to outperform. Demand is very strong as net absorption was nearly 425 million SF in the last 12 months ending in Q3 2022. Although demand may have tapered, the volume of industrial space absorbed continues to be double that of pre-pandemic times. As a result, this sector had the lowest vacancy rate at 4% of any other sector in the commercial real estate market.
At 11.8% year-over-year, U.S. industrial rent growth remains near historic highs. Rents are rising even faster for logistics space is up on average 13.5% year-over-year compared to 8.6% for flex space and 9.7% for specialized space.
As consumers cut back on spending due to elevated inflation, the net absorption of retail store space decreased to 16 million sq. ft. in the third quarter of the year. However, neighborhood retail that offers in-person services continues to advance. Net absorption for neighborhood centers rose by 35 percentage points compared to the second quarter of the year.
During the summer months (June-August), hotel occupancy rose to 68.7% from 66.2% the previous year. However, hotel occupancy remains below the pre-pandemic level as inflation remains elevated.