Monday Morning Scoop - Where CRE Is Beginning to Lag

Where CRE Is Beginning to Lag

Demand and rent growth for apartments slowed in the third quarter, in a sign of a potential overall slowdown for commercial real estate more generally, though industrial demand continued unabated

“While the industrial boom continues to show no signs of stopping, multifamily absorption and rent growth are decelerating,” writes Nadia Evangelou of the National Association of Realtors in a new report. “Multifamily absorption in the last four quarters was below the pre-pandemic levels, in the range of 60,000-70,000 units. In the meantime, rents rose year-over-year at a slower pace, by less than a double-digit percentage. However, multifamily housing demand remains relatively strong. Considering rising mortgage rates and home prices, people may be forced to rent for longer due to decreasing affordability.”

NAR notes, however, that government data appears contrary, showing that rent growth is actually accelerating. But because the Consumer Price Index uses data from the Consumer Expenditure Survey to determine the level of prices for goods and services — and since most renters responding to the survey report rent they locked in at an earlier time  –”rent changes may take months to show up in government data,” Evangelou says. “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.”

Office also continued to struggle in the third quarter, with 1.34 million more square feet of office space was vacant and placed on the market than were leased during that period.

“Although more people returned to their offices, after four quarters with positive net absorption, demand for office space dropped as net absorption turned negative again,” Evangelou says. “As a result, the market’s net demand for office spaces decreased relative to supply, and the vacancy rate rose to 12.4% in Q3 2022 from 12.3% in the previous quarter. Meanwhile, the office sector has the highest vacancy rate across all sectors of the commercial real estate market.”

Some bright spots? Retail, which enjoyed positive demand for a seventh consecutive quarter, and industrial, which registered a net absorption of nearly 425 million square feet in the last twelve months ending in Q3 2022.

By: Lynn Pollack
Source: GlobeStreet