According to top economists at the National Association of Realtors, commercial real estate has slowed down in Q3 2022. After the strong rebound for the U.S. economy in 2021, growth in 2022 has slowed in the face of rising inflation, tight household income, as well as geopolitical events. While the economy continues to deal with rising inflation, data shows a slowdown in the growth of some aspects of commercial real estate. Demand for apartments and office spaces is lower compared to previous quarters.
While the industrial boom continues to show no signs of stopping, multifamily absorption and rent growth are decelerating. Multifamily absorption in the last four quarters was below the pre-pandemic levels.
However, multifamily housing demand remains relatively strong. Given rising mortgage rates and home prices, people may be forced to rent 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 was vacant and placed on the market than were leased. 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.
Demand for retail spaces has remained positive for seven straight quarters. Retail sales – excluding gas, auto, and non-store retailers – advanced to $383 billion in August, a 19% increase from pre-pandemic levels (August 2019). As a result, net absorption increased to 23.3 million sq. ft. in the third quarter of 2022, a 22% increase from the second quarter. Meanwhile, neighborhood retail that offers in-person services continues to advance even faster.
The industrial sector continues to outperform. Demand is strong as net absorption was nearly 425 million sq. ft. in the last 12 months. 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.
As demand remains strong, rent growth of industrial spaces continues at historic highs, rising by a double-digit percentage (12%) in Q3 2022.
Inflation, interest rates, supply chain problems, and geopolitical events are the main factors that will determine how commercial real estate will perform in the following months. Stay tuned for updates!
