Inflation, War Take Their Toll

Pressures on the market drove down third-quarter activity.

After the strong economic rebound in 2021, growth in the U.S. has slowed in the face of rising inflation, the household income squeeze, and geopolitical events. In commercial real estate, third-quarter 2022 data showed slowdowns in the apartment and office sectors, while industrial and retail retained strength.

Why don’t private and government rent data align?

Government data, as reported in the Consumer Price Index, draws from the Consumer Expenditure Survey. In that survey, renters are likely to report rental rates locked in earlier. Changes may take months to show up in government data. In contrast, the private sector publishes listed rents— current rent prices.


Multifamily absorption and rent growth decelerated in 2022 with absorption in the 60,000–70,000-unit range. That’s below pre-pandemic levels. In the meantime, rents rose year over year, but at a slower pace than a year ago. However, multifamily housing demand remains strong. Given rising mortgage rates and home prices, people may be forced to rent for longer due to decreasing affordability.


As the country navigates hybrid work, the office sector continues to struggle. In Q3 2022, about 1.34 million more square feet of office space were vacant and placed on the market than was leased. Although more people returned to their offices, after four quarters with positive net absorption, demand for office space dropped. As a result, the market’s net demand for office spaces decreased relative to supply, and the national vacancy rate rose to 12.4% in Q3 2022 from 12.3% in the previous quarter. The office sector has the highest vacancy rate across all sectors.


Although spending slowed this fall, it remained strong in Q3 2022, driving growth in demand for retail spaces for the seventh straight quarter. Retail sales, excluding gas, auto, and non-store retailers, advanced to $383 billion in August, a 19% increase from August 2019. As a result, net absorption increased to 23.3 million square feet in Q3 2022, a 22% increase from the second quarter. Neighborhood retail that offers in-person services continues to advance even faster. Net absorption for neighborhood centers rose by 35 percentage points compared to the year’s second quarter.


Demand for industrial property remains robust. Net absorption was nearly 425 million square feet in the 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 in Q3 2022, at 4%.

With such strong demand, rent growth continues at historic highs, rising 12% year over year in Q3 2022. Rents are rising even faster for logistics space, at 13.5% year over year.


About Create

Create is a quarterly publication for commercial practitioners, members of the National Association of REALTORS® and commercial real estate industry leaders. Members can subscribe by updating your member profile information to include commercial interests in the "Field of Business" list.

Update your Field of Business in your member profile.