U.S. commercial real estate investment volume fell by 24% year-over-year in Q3 to $154.5 billion. Multifamily was the leading sector with $69 billion, followed by industrial and logistics with $31 billion each. Within the last 4 quarters, Los Angeles was the top market with the largest transaction volume with $66 billion, followed by New York City with $64 billion. This was a 40% increase y/y.

Construction and development cost continue to escalate, making replacement cost higher across all asset classes. This combined with higher borrowing costs for developers, is curbing the supply of new inventory generally across the board.

U.S. Commercial Real Estate Investment Volume by Quarter

U.S. Commercial Real Estate Investment Volume by Sector

U.S. Commercial Real Estate Investment Volume by Market (Last 4 Quarters)

U.S. Real Estate – Multifamily Market

Q3 was the second consecutive quarter of negative net absorption, with new units completed exceeding new units rented. Although demand is typically the strongest in Q3, renters have become more cautious this year amid growing economic uncertainty. On top of that, Q3 delivered 91,900 new units of multifamily, the highest level since the 1980s.

Vacancy rate increased to 3.9%, but is still below its long-term average of 4.9% and the pre-pandemic level of 4.1%.

New multifamily development starts has slowed, primarily due to financing issues, construction delays, and supply chain issues, while demand for rental units continue to increase. The increase was consistent across all classes of multifamily assets, with Class A at 4.5%, Class B at 4.0%, and Class C at 3.1%. The spread between Class A and C has also elevated, indicating a demand shift to lower-cost housing, as a result of economic uncertainty.

Nominal wages continue to increase as a result of ongoing inflation, making the long-term outlook for the multifamily sector favorable. Average rent increased 10.5% y/y in Q3. However the pace of rent growth is beginning to cool off, following the 14.6% y/y growth in Q2, and the 15.2% y/y growth in Q1. In addition, it is important to monitor the risk of contracting discretionary income, caused by the rising price of consumer goods and services. That being said, multifamily remains the most popular commercial real estate sector for new investments, accounting for over 45% of the total investment volume in commercial real estate.

U.S. Multifamily Vacancy Rate and YoY % Change

U.S. Multifamily Vacancy Rate by Class

U.S. Multifamily Monthly Rent and YoY % Change

U.S. Real Estate – Commercial Retail Market

Retail vacancy fell to 5.0% in Q3, with limited delivery of new spaces. Asking rents growing by 2.5% y/y. The consumer sentiment hit a record low in Q3, but retail sales remained strong. This will be important heading into the holiday season of the 4th quarter.

High construction costs have also pushed retail tenants to renew existing leases rather than search for new spaces, which often require some level of tenant improvement construction.

U.S. Consumer Retail Sales Growth and YoY% Change

U.S. Retail Sales by Category

U.S. Retail Vacancy Rate by Property Type

U.S. Retail Average Asking Rent

Data Sources: CBRE Research, CBRE Econometric Advisors, CoStar Realty Information Inc., Bloomberg, Zillow Group, Redfin

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Grandway Group
Email:   Info@grandway.com
Tel:        +1 626-357-1200

In July, the U.S. market participants were hopeful for the possibility of interest rate cuts by the Federal Reserve in 2023, given concerns about the global slowing growth. However, such hopes vanished at August’s Jackson Hole summit of central bankers, where the Fed reaffirmed its commitment to fighting inflation. This sent stocks lower in the second half of the quarter. The Fed raised the federal funds rate by 75 basis points (bps) to 3.25% in September; the third consecutive 75bps increase. As a result, U.S. equities fell in Q3. The communication services sector, including both telecoms and media stocks, was among the weakest sectors over the quarter, along with real estate. The consumer discretionary and energy sectors proved the most resilient.

The core personal consumption expenditure index (the Fed’s preferred measure of inflation) ticked up again in August and increased, on a year-on-year (y/y) basis, from 4.7% to 4.9%. GDP data confirmed that the U.S. economy is in a “technical recession” with GDP falling by -0.6% y/y in Q2 after a -1.6% contraction in Q1. However, other data showed resilience, such as the August non-farm payrolls report that showed 315,000 new jobs added that month. Following two consecutive quarters of negative GDP growth, Q3 broke the trend and grew by a 2.9% y/y. Many believe that the uptick in GDP growth was primarily driven by an increase in export, as a result of lifting of trade restrictions with the rest of the world, while growth and inflation are still on a negative trend.

With the economy still facing challenges in multiple fronts including continued supply chain issues, labor shortages, inflation, and Ukraine/Russia geopolitical uncertainly, the key focus will be the Fed’s critical balancing between raising rates to curb inflation, versus preventing the economic growth turning into contraction.

In their September Open-Market Committee statement, the Fed announced another 75bps increase to its target rate, bringing it to 3.25%. Once again, the Fed reiterated its goal of maintaining high employment while bringing inflation rate down to 2%, and stated its intention of further rate increase.

Overall CPI inflation for the last 12 months was 8.2%, down from over 9% last quarter. Transportation and travel sectors achieved double-digit levels, while energy increases were much lower than Q2.

With another quarter of solid employment levels, by the end of Q3 the entire past 12 months are now hovering between 3.3% to 4.4%, with Q3 ending at 3.3%, as reported by the U.S. Bureau of Labor Statistics. In its October press release, the BLS reported that notable job gains occurred in leisure, hospitality, and healthcare industries, with professional services and business services sectors also growing.

After recovering some of the losses experienced in Q2 early on in the quarter, the U.S. stock market turned negative at the later half of Q3. All equity markets have now reverted back to pre-COVID levels. The sell-off was broad-based, but technology companies were hit the hardest, causing the NASDAQ to decline 1.1%.

Data Sources: CBRE Research, CBRE Econometric Advisors, CoStar Realty Information Inc., Bloomberg, Zillow Group, Redfin

For additional information, please contact:
Grandway Group
Email:   Info@grandway.com
Tel:        +1 626-357-1200