Watching the Fed

The first quarter of the year was anything but boring for the commercial real estate market. Slower rent growth and rising vacancy rates dominated the market. Vacancy rates reached new record highs in the office sector, which continued its struggle to recover from the pandemic. Meanwhile, with multifamily construction overperforming in the last couple of years, apartment rent growth slowed down further from the record highs during the pandemic. Although leasing activity is slower, the retail sector was able to keep vacancy rates near 4%, the lowest vacancy rate of any sector. And rent prices for industrial spaces continued their climb, growing more than 10% year over year, significantly faster than pre-pandemic. While most of the sectors slowed from their record high activity in 2021, recent developments in the banking sector added concerns to the market. Regional banks are a critical part of the commercial real estate market because they support the majority of commercial real estate loans. If the Federal Reserve continues rate hikes, more small banks may pull back on commercial real estate lending. The good news: Inflation fell below 5% in April. This could make the Fed pause its rate hikes and switch to rate cuts soon.