Market Overview

In the second quarter of 2023, the U.S. commercial real estate market saw mixed performance, as different sectors faced varying degrees of challenges and opportunities amid the ongoing economic recovery. The multifamily sector showed resilience and stability, while the office sector continued to struggle with weak demand and high vacancies. Retail saw signs of improvement but faced structural changes and uncertainties.

Multifamily vacancy remained flat at 5%, and rent growth has come back down to pre-pandemic levels. Office vacancies remained high at 18.9% nationwide, and asking/effective rent stayed in the $35/$28 per sq. ft. range. Retail vacancies declined to 10.2%, and asking/effective rent remained in the $21/$18-persqft range.

U.S. commercial real estate investment volume fell 64% year-over-year in Q2 to $75 billion. Multifamily continued to be the preferred sector with $27 billion in transaction volume, followed by industrial and logistics with $21 billion. Los Angeles remained the most favored investment market on a trailing-four-quarter basis, with $43 billion in transaction volume, followed by New York with $37 billion.

Q2 saw more buying activity from private and foreign investors, while REITs and institutions sold more properties than they bought. The amount of investment capital coming from overseas investors was down to $4.9 billion, dropping by nearly 50% from Q2 last year, due to economic uncertainty and the strength of the U.S. dollar.

The commercial real estate market in Q2 reflected the uneven and uncertain nature of the economic recovery. It was also influenced by various factors, such as monetary policy, inflation, labor market conditions, consumer behavior, migration patterns, and technological innovation.

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) ⇩
(USD Billions / % Figures Shows Change from Trailing 4 Quarters in Prior Year)

Multifamily Market

The multifamily market improved in the second quarter, buoyed by increased demand and moderate rent growth. But the sector still faced some challenges with oversupply in the short-term and reduced investor interest in general.

Demand increased moderately as more people rented apartments in Q2 because economic conditions improved and household formation increased. However, at the same time, short-term supply was very high in Q2, as new buildings delivered a record 351,500 units in the last four quarters. This was mainly a result of the strong pipeline of new development projects that started before or around the beginning of the pandemic, which were completed in the past four quarters. Construction starts have decreased in recent quarters, which is expected to reduce new supply in 2024 and later.

The vacancy rate for multifamily units increased slightly to 5.0% in Q2, which is closer to the historical longterm average, suggesting that supply and demand are starting to balance out. However, different markets had vastly different vacancy rates, with some major cities having high vacancies and some smaller markets having low vacancies.

Rent growth in Q2 appeared to be normalizing and approaching the pre-pandemic long-term growth rate. The average monthly rent for multifamily units increased slightly by 1.1% in Q2 to a record high of $2,164 since 2005 (start date of our data set). On a year-over-year basis, the average monthly rent increased by 2.6%, similar to the pre-pandemic five-year average of 2.7% per year.

The investment volume for multifamily in Q2 increased 2.7% from Q1 to $27.5 billion, which is still much lower than the $95.6 billion volume seen in Q2 2022. This was the lowest Q2 volume since 2014, except for Q2 2020 because of the pandemic. It was also 27% lower than the quarterly average from 2013 to 2019. The low transaction volume was mainly the result of economic uncertainties and limited credit availability, which made acquisitions difficult. Investors were careful and picky, preferring high-quality assets in strong markets.

We expect the industry to continue to be impacted by economic uncertainty and shortage of credit, but it is a resilient industry that is unlikely to collapse.

U.S. Multifamily Vacancy Rate and QoQ % Change ⇩

U.S. Multifamily Vacancy Rate by Class ⇩

U.S. Multifamily Monthly Rent and YoY % Change ⇩

Commercial Retail Market

Retail vacancies fell slightly by 0.10% to a record low of 4.8% in Q2 2023, driven by the strong performance of neighborhood retail and strip centers as well as the growth in demand in suburban regions.

Asking rents increased to $23.21 per sq. ft., an average year-over-year increase of 2.1%, marking the largest quarterly increase since Q1 2022.

On the other hand, net absorption of U.S. retail recorded 5.9 million sq. ft., the lowest level of demand since Q3 2020, when absorption was negative at the height of the pandemic. Elevated construction costs and economic headwinds also kept construction completions at historically low levels.

U.S. Retail Construction Completions ⇩

U.S. Retail Vacancy Rate by Property Type ⇩

U.S. Retail Asking Rent and Y-o-Y% Change ⇩

Data Sources: CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, Bloomberg, WSJ.com, Zillow Group, Redfin, CNN Business, CNBC, CBS News, S&P Global, The Conference Board, Deloitte Insights, Nasdaq, Bureau of Labor Statistics, U.S. Census Bureau, U.S. Chamber of Commerce, World Economic Forum, Federal Reserve Bank of St. Louis & Federal Reserve Bank of Atlanta

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

Market Overview

The U.S. real estate market is facing a challenging year in 2023, as high-interest rates and a recession continued to weigh on asset values and fundamentals. According to CBRE, weakening fundamentals and higher cost of capital will generally lower asset values by an average of 10% across all sectors. In Q1, commercial real estate investment volume for the trailing 12 months fell 33% to $594 billion. Institutional and private investors were net buyers, while REITs and foreign investors were net sellers. Multifamily remained the leading sector with $25 billion in Q1 transaction volume, followed by industrial and logistics with $17 billion.

U.S. Commercial Real Estate Investment Volume by Quarter

U.S. Commercial Real Estate Investment Volume by Sector
(USD Billions)

In Q1 2023, Greater Los Angeles continued to be the preferred market for real estate investment, with a total investment volume of $51 billion, followed by New York with $42 billion and Dallas with $31 billion. Of the top 20 markets, Nashville had the smallest decline in transaction volume at 13%.

U.S. Commercial Real Estate Investment Volume by Market (Last 4 Quarters)
(USD Billions / % Figures Shows Change from Trailing 4 Quarters in Prior Year)

Cap rates expanded by approximately 125 to 150 basis points (bps) across all property types since early 2022, translating to a 15% to 22% decline in values based on actual transactions.

Historical Cap Rate and Forecast Across Sectors

Due to their strong fundamentals and positive long-term demand outlook, multifamily and industrial properties remained the most favored by investors. Grocery-anchored retail centers also performed well, while office investors preferred high-end Class A buildings.

After facing unprecedented challenges and spikes in costs over the past two years due to materials, labor, and margins, construction costs may moderate in 2023 as materials costs likely won’t rise. However, labor costs and margins likely will increase. Construction spending is expected to remain strong next year, driven by the record-high value of construction starts in 2022 and the $500 billion infrastructure program. Activity may slow down later in 2023 due to rising interest rates and economic slowdown, especially in the residential sector.

Annualized Construction Starts by Property Type

Commercial real estate will face a tough year in 2023 due to high-interest rates and possible recession. However, businesses are financially healthy and are expected to avoid laying off workers in a competitive labor market. Consumers are cautious but have fairly strong balance sheets with lower debt levels compared to previous recessions. These factors imply a moderate slowdown, with unemployment likely staying below 6%. Inflation is expected to fall by the second half of 2023, paving the way for lower interest rates and a new cycle that may last until the 2030s.

The real estate sector will still face rapid changes despite the economic challenges. Some buyers will be discouraged by higher capital costs, but large equity players who can invest capital fast will have opportunities. However, these investors will have a limited window: after the Great Recession, the pricing low point only lasted about six to nine months before cap rates started to shrink. The window of opportunity may be even smaller this time, as the recession is expected to be relatively short. ESG issues and the digital economy will also shape real estate demand. Hybrid work will benefit both employers and employees, but it will require adaptation from office owners and occupiers. Cities will also have to cope with new commuting habits and lower office demand.

The outlook for different sectors will vary, with data centers and industrial real estate likely to be the most resilient, followed by multifamily and retail. The office and hospitality sectors are expected to face more headwinds, and the life sciences sector should see a slowdown in activity after a COVID-induced boom. All sectors and locations will have to comply with decarbonization mandates from governments, occupiers, and investors.

Multifamily Market

Multifamily fundamentals weakened in Q1 2023 due to slow leasing, new deliveries, rising vacancies, and plateauing rents. Investment volume totaled $24.7B, a 63.7% year-over-year decrease and 25% less than the 2013-to-2019 average. Supply pressures are high but manageable, while construction debt is scarce and expensive, slowing down new starts.

Demand in the multifamily sector is expected to lag supply in the near term due to economic uncertainty, pushing vacancy toward 5%. 57 markets had vacancy rates exceeding 4.0%, up from 52 in Q4 and 43 in Q3 of 2022.

U.S. Multifamily Vacancy Rate and QoQ % Change

While the increase in vacancy rates extended across all multifamily classes, class A vacancies increased at a lower rate than class B and class C assets, which suggests that renters are not giving up their standard or living or moving to lower-cost housing despite the economic uncertainty. All three asset classes witnessed a deceleration in vacancy rate increases.

U.S. Multifamily Vacancy Rate by Class

Average monthly nationwide rent increased by 4.5% on a year-over-year basis. While this is down from the record 15.3% increase in Q1 2022, it is still well above the pre-pandemic average of 2.7%.

U.S. Multifamily Monthly Rent and YoY % Change

Multifamily rental demand continued to be high because of the difficult for-sale market, where home prices remain high and mortgage rates soared.  According to CBRE, the average monthly payment for a new home in Q3 2022 was 57% more than the average rent, the biggest difference ever recorded.  In comparison, the gap was only 8.5% before the pandemic.  The current large gap suggests that renting will remain more affordable than buying and owning, even if home prices and mortgage rates go down next year.

U.S. Multifamily Cost of Ownership vs. Cost of Renting

Multifamily sector has demonstrated solid fundamentals and an average annual total return of 9.3% over the past decade. It also has access to Fannie Mae and Freddie Mac, which are unavailable to other sectors. These factors make multifamily one of the best asset classes to hedge against inflation. As the market stabilizes, more investors and lenders are expected to capitalize on this opportunity in 2023.

Commercial Retail Market

Commercial retail saw rents increase and vacancies fall across all retail sectors in Q1 2023. Vacancy rate fell to 4.8% in Q1 2023, a record low since CBRE began tracking the market in 2005. Rent growth fell by 50 bps year-over-year to 2.0% but remained above the 10-year average of 1.7%.

U.S. Retail Vacancy Rate by Property Type

Average asking rent grew by about 2.0% in Q1 2023 from the same period in 2022 but remained above the 10-year average of 1.7%. Neighborhood, community & strip centers continued to be the strongest performers, with rent growth of 2.7% over the prior year, while lifestyle & mall, and power center rents were unchanged.

U.S. Retail Average Asking Rent

In Q1, total retail sales dropped to 5.4%. Core retail sales, which exclude nonstore retail sales, increased by 0.5% from the previous quarter to 7.7%. Nonstore retail sales, which include e-commerce, decreased by 1.2% from the last quarter to 9.8%. Both core and nonstore retail sales grew slower than a year ago, by 3.5% and 0.6%, respectively.

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

U.S. Retail Sales by Category

Q1 saw muted retail space deliveries for the quarter at 5.1 million SF, with a rolling 12-month total of 26.7 million SF, the second lowest on record behind only 2022. This trend of diminished development is expected to continue, with retail construction starts for the quarter totaling 4.8 million SF.

Retail fundamentals remain strong in 2023, thanks to limited new supply and positive net absorption. Retail deliveries have hit record lows for three consecutive years, while demand for retail space has outpaced supply. As a result, rents have increased, and vacancies have decreased across most retail subtypes. Moreover, more than 50 million SF of retail space has been repurposed since 2003, with 10 million SF in the last five years alone. This trend is expected to continue in 2023 as owners of underperforming malls and centers transform their properties into mixed-use developments.

Despite the challenges of high inflation, rising interest rates, and labor shortages, retail fundamentals are expected to stay solid in 2023 as brick-and-mortar retail sales keep growing from the previous year and as the high construction costs and the limited supply of retail space continue to persist.

Data Sources： CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, CoStar Realty Information Inc., Bloomberg, WSJ.com, Zillow Group, Redfin, Bureau of Labor Statistics, & U.S. Census Bureau

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

U.S. commercial real estate investment volume fell by 63% year-over-year in Q4 to $128 billion. Total investment volume for the year fell by 17% from 2021 to $671 billion, which is still the second highest year in history.

In Q4, institutional and private investors were net buyers, while REITs and foreign investors were net sellers. Multifamily was the leading sector with $48 billion in transaction volume (down 70% year-overyear from 2021), followed by Industrial and logistics sector with $32 billion (down by 58% from 2021) and Office sector with $19 billion (down 66% from 2021).

U.S. Commercial Real Estate Investment Volume by Quarter
(USD Billions)

U.S. Commercial Real Estate Investment Volume by Sector
(USD Billions)

In 2022, Los Angeles was the most preferred market with total investment volume of $53 billion, followed by New York City with $51 billion and Dallas with $39 billion. Out of the 20 top markets nationwide, Nashville was the only city whose transaction volume in 2022 did not decline from the prior year.

U.S. Commercial Real Estate Investment Volume by Market (Last 4 Quarters)
(USD Billions / % Figures Shows Change from Trailing 4 Quarters in Prior Year)

Multifamily Market

U.S. multifamily investment volume in 2022 totaled $278.8 billion, down by 19% year-over-year, but was still the second largest annual volume on record.

Vacancy rate in Q4 rose 0.70% from the prior quarter to 4.6%, which is still below the long-term average of 5.0%. The increase in vacancy was likely a result of delayed household formation due to economic uncertainty, and a surge in short-term supply caused by some developers rushing to complete construction in response to rising interest rate and market uncertainty.

U.S. Multifamily Vacancy Rate and YoY % Change

Vacancy rates across all property types within multifamily sector increased in Q4 2022, however, Class C continued to have the lowest vacancy rate at 3.9% versus Class B at 4.6% and Class A at 5.1%. The vacancy rate of Class C properties (lowest cost) seems to be moving in the same direction as Class A and Class B properties (higher cost). This suggests that, at least for the time being, households seem to be willing to maintain their current standard of living rather than moving towards lower-cost housing, despite the economic uncertainty and rising mortgage rates.

U.S. Multifamily Vacancy Rate by Class

Average rent nationwide increased by 6.7% year-over-year in Q4. This is down from the record 15.2% year-over-year increase in Q1 but it is well above the historical average of 2.7% annual increase.

U.S. Multifamily Monthly Rent and YoY % Change

For the multifamily sector, Q4 marked the third consecutive quarter of negative net absorption (net balance of newly leased space minus new construction), with 100,300 newly completed units and 84,700 new leases, resulting in an estimated -15,600 units of net absorption. However, the surplus in new construction is substantially less than the prior quarter, and analysts expect the net absorption to turn positive in 2023.

New construction completed in 2022 totaled 341,200 units, which is the highest new construction volume in more than 30 years. However, data suggests that new construction starts in Q4 were down considerably as the cost of construction and the availability of financing have been negatively impacted by rising interest rates. As a result, we expect the growth rate of new supply to slow down and a shortage of supply to develop in the coming years.

Commercial Retail Market

Commercial retail sector saw its average rent increase and vacancy fall in Q4 and in 2022, primarily fueled by strong demand for retail space and a lack of new supply. Retail vacancy fell to 4.9% in Q4, driven by strong demand from retailers and a lack of supply of new spaces. Vacancy fell across the board for all sectors of retail.

U.S. Retail Vacancy Rate by Property Type

Average retail asking rent grew by 2.5% in Q4 from the same period in 2021, to finish the year 2022 at $22.78 per SQFT. Neighborhood, community, and strip centers had the strongest rent growth of 0.6% from the prior quarter and 3.0% from the prior year. Meanwhile, lifestyle and mall properties were the underperforming sector which saw its asking rents fall by 0.7% from the prior quarter but remains up 0.4% from a year ago.

U.S. Retail Average Asking Rent

Retail sales remained strong despite economic uncertainties, and sales during the holiday shopping season in Q4 were 7.6% higher than the prior year. There also seems to be a continuous return to brick-andmortar retail and a return to in-person shopping experiences by consumers, versus purely online shopping, which contributed to demand for retail space. Furthermore, a return of tourism and travel within the country also contributed to retail sales in luxury markets. All of these factors resulted in robust demand for retail spaces in Q4 and 2022 generally.

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

U.S. Retail Sales by Category

Q4 was the ninth consecutive quarter of positive retail absorption, during which the net absorption (net balance of newly leased space minus new supply) was a total of 12.7 million SQFT. Approximately 5.4 million SF of new retail space was newly completed in Q4, which is substantially less than the 10-year average of 12.7 million SF. This brought the total new construction volume for 2022 to just 22 million SQFT, which is a new annual low and the third consecutive year in which new construction set a record low. Furthermore, new construction starts in Q4 fell by 40% from the prior quarter and 18% year-overyear to just 10.7 million SQFT.

Commercial retail space has demonstrated resilience in the face of shifting consumer trends from productfocused sales to in-person experiences and restaurants. Demand for physical retail space is now stronger than it was pre-pandemic while new construction volume is at a historical low. We expect the sector to show robust growth for the coming years.

Data Sources：CBRE Research, CBRE Econometric Advisors, J.P. Morgan Asset Management, CoStar Realty Information Inc., Bloomberg, WSJ.com, Zillow Group, Redfin, Bureau of Labor Statistics, & U.S. Census Bureau

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

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

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Email:   Info@grandway.com
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U.S. commercial real estate investment volume rose by 10% year-over-year in Q2 2022 to $167 billion. Multifamily was the leading sector with $78 billion in Q2 volume, due to the resilience shown by this asset class as well as continued housing shortage. Industrial and logistics properties had $32 billion in total volume for the quarter; the pandemic not only created a boom in online retail, but also caused a permanent migration of consumer behavior towards online retail. In third place was office properties with $24 billion in transaction volume, driven by workers returning to the office.

While a sharp rise in interest rate will generally drive down real estate prices, there are many other factors at play. The Federal Reserve’s multiple increases to its target rate have both short-term and long-term effects. In the short-term, rate increases will discount the prices of real estate assets, as the market now demands a higher rate of return on those assets for sale given the same rental income. Furthermore, those assets whose mortgages are structured with variable rate without an interest cap built in will be facing increased monthly mortgage payments, which cut into net operating income and asset value. Lastly, many lenders will experience a sudden increase in their cost of capital (borrowing costs), which may cause some lenders to temporarily pull back from lending altogether. Nonetheless, the long-term impacts to the industry are positive – once the interest rate increases implemented by the Fed takes effect in reducing inflation, the U.S. economy should emerge out of recession relatively quickly and return to growth. Comparatively this is a manageable short-term sacrifice in order to prevent a much more painful longterm decline.

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

In Q2 we saw an increase in the overall U.S. multifamily vacancy rate to 3.1% from 2.4% in Q1. This was the first increase in five quarters, but this vacancy level is still well below the long-term average of 4.9%. The increase was largely a result of high inflation and loss of consumer confidence, causing families to consolidate rather than rent separate units. This increase seemed to be consistent across all classes of multifamily assets in both city centers as well as surrounding areas. Not surprisingly, the average rent per unit also reached a historic new high of $2,080 per month, buoyed by continued inflation and low unemployment rate.

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

Total retail sales growth dropped to 3.8% even during an inflationary environment, a sign that the recovery in the retail sector is nearing its end, and consumer confidence may be eroding and hurting spending. Retail space absorption fell by 40% compared to Q1 and fell by 20% compared to Q2 2021, also indicative of the end of the retail recovery. Average retail asking rent grew by 2.4% year-over-year, the highest increase in more than 5 years, but it is still lagging the wage growth of 4.4% year-over-year.

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

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

Markets in the first half of 2022 have been generally disappointing, with sharply rising inflation and interest rates, falling stock prices, a rampant wave of Omicron virus, and Russia’s shocking and brutal invasion of Ukraine. These factors, combined with a partisan political environment, have driven consumer sentiment down to its lowest level on record. On the positive side, however, while real GDP shrank in Q1, recent monthly data suggested solid growth during the course of Q2 as the Omicron variant subsided and spending picked up in the industries that were impacted the most by the pandemic such as travel, restaurants, leisure, and entertainment.

Entering Q3, several factors continue to weigh on economic momentum. After two years of record stimulus, the U.S. economy is facing significant fiscal slowdown, with the federal budget deficit likely to fall from 12.4% of GDP in 2021 to less than 4% of GDP this year, which would pose the single largest decline since the end of World War II. This decline reflects an end to stimulus checks, enhanced unemployment benefits, enhanced child tax credits, and a host of other programs that were supporting lower and middle-income households during the pandemic. In addition, a surge in 30-year mortgage rates is weighing on the housing sector and an 8%+ rise in the trade-weighted dollar year-to-date is impeding U.S. exports. All of this, combined with collapsing consumer confidence, has raised the risk that the U.S. economy would fall into recession in the near term.

The U.S. Federal Reserve has two main mandates: to control inflation and to control unemployment rate. As expected, the extraordinarily strong labor market and persistent inflation have pushed the Fed to adopt a much more hawkish stance. At its June meeting, the Fed increased the federal funds rate by 0.75%, following increases of 0.25% in March and 0.50% in May. In addition, the median expectation among FOMC members is for the rate to be further increased by 1.75% this year and by 0.5% next year, bringing the federal funds rate to a range of 3.25%-3.50% by the end of 2022 and 3.75%-4.00% by the end of 2023. On quantitative tightening, the Fed is also increasing the pace of reduction of their massive bond holdings to up to $95 billion/month by September.

Notably, the Fed expects inflation will fall towards its 2% target over the next few years. The latest Federal Reserve forecast suggests that annual PCE core inflation may fall from its current 4.8% to 4.3% by Q4 2022, to 2.7% by Q4 2023, and eventually to 2.3% by Q4 2024. Futures markets seem to generally agree with the Fed’s forecasts of the federal funds rate for the rest of 2022, but it appears that market participants expect the Fed to ease policy starting in the first half of 2023, suggesting the possibility that the aggressive moves by the Fed may tip the economy into recession and cause the Fed to again start easing monetary policy.

The labor market in the U.S. continues to be a bright spot. In an otherwise gloomy economic environment, the unemployment rate remained at 3.6% for the third consecutive month in May, just 0.1% above its 50- year low in 2019. There continues to be massive excess demand for labor, with roughly 5.45 million more job openings than unemployed workers in May. This excess demand should fade over the next few months, reflecting slowing economic momentum and diminished business confidence. However, it is likely to keep wage gains elevated and hopefully encourage an increase in labor force participation, particularly as an aging baby-boom generation and limited immigration continue to reduce labor supply.

High inflation in the U.S. has been a result of strong consumer spending combined with supply shortages across major sectors of the economy. More recently, this has been amplified by a general recovery in airfares, hotel rates, and rents from their pandemic lows. Inflation has been further exacerbated by continued supply chain problems due to the Russian invasion of Ukraine and China’s attempts to maintain a “zero-COVID” policy. By the end of 2022, we do expect some of the supply-driven issues to fade, alleviating the current inflation. However, the longer high inflation persists, the stickier it gets and the more likely core PCE inflation would remain above 3% year-over-year throughout 2022 and 2023. The potential persistence of inflation above the Fed’s 2% target over the next two years will have major implications for monetary policy.

Following a spectacular 2021, during which S&P 500 earnings-per-share (EPS) rose by 70%, profits are growing much more slowly in 2022. In the first quarter, EPS rose just 4.2% year-over-year and analysts are currently expecting an increase of less than 8% for the entire year 2022.

However, even these estimates may be optimistic. Companies are facing a number of different headwinds – rising wages, higher commodity prices and input costs, higher interest rates and slowing nominal sales growth. While energy companies will continue to benefit from high margins, in most other industries these headwinds are likely to cut into profits. A much higher dollar will also hinder exports and overseas sales, while recession concerns could cause company managements to cut discretionary expenses.

A recession would certainly lead to a sharp decline in corporate profits. However, if this eventually leads to less wage pressure and easier monetary policy, it could create a better long-term business environment all around. Furthermore, gridlock in Washington and the prospect of a Republican takeover of Congress after midterm elections later this year suggest that we are unlikely to see an increase in corporate taxes, suggesting that after-tax profit margins are likely to remain at the current high levels.

The global economy presents a mixed picture entering the second half of 2022. On the positive side, the effects of the pandemic are fading in most parts of the world due to widespread immunity gained from both inoculation, infection, and virus variants becoming less deadly. However, the Chinese economy continues to be impacted by the pandemic as it struggles to sustain a “zero-Covid” policy. European economies are also being badly impacted by much higher energy prices resulting from the war in Ukraine.

Inflation has become a global concern and most central banks are tightening policy to combat it. While we do not expect this to result in a global recession, it should slow the pace of economic recovery around the world. This should, however, relieve some of the pressure on commodity prices if 2023 sees positive economic growth but less inflation around the world.

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

Commercial real estate investment activity remained robust heading into 2022. Total U.S. commercial real estate investment volume in Q1 2022 was $150 billion, a strong 45% increase from the same period in 2021. The volume in Q1 2022 was quite significantly lower than the $296 billion in Q4 2021, but one must note that Q4 was an all-time historically high volume created by pent-up demand as well as an anticipation of interest rate hikes. Multifamily continued to lead the sectors in investment volume with $57 billion transacted in Q1, up 42% from the same quarter last year. Industrial properties and office were the next two largest sectors with $42 billion in volume in the quarter. Although only at $17 billion transacted in the quarter, the retail section showed strong signs of recovery, showing a strong 87.3% growth compared to the same quarter last year.

When we rank the cities by investment volume in the past 12 months, the top 10 cities are dominated by very large and mature markets led by New York, Los Angeles, and Dallas. Our Fund currently has assets in some of the larger markets as well, including Dallas (3rd at $49bn), Atlanta (5th at $39bn), and Chicago (10th at $25bn). However, what is particularly noteworthy is the next 10 on the list, most of which are markets that this Fund watches very closely and invests quite heavily in, including: Austin (14th at $18bn), Orlando (16th at $14bn), Charlotte (17th at $13bn), Raleigh/Durham (19th at $13bn), Tampa (20th at $12bn). We believe these secondary markets offer more attractive risk and return profiles than the larger and more mature markets. Multifamily and industrial assets are still seeing the most investment for good reason; however, retail investment activity has increased as retail sales continues to recover as U.S. economy opens up.

Persistent inflation has not dampened real estate activity thus far, but the rest of 2022 could prove challenging if current economic concerns persist or worsen. Inflation generally boosts real estate prices in the short term as wages and rents increase, while the counterbalance of higher maintenance and repair costs is slightly muted in comparison. However, prolonged inflation tends to stunt economic growth, so the longevity of inflation is a factor we are observing very closely.

As far as interest rates go, rising rates in the short term can cause dramatic discounts to real estate prices. When the Federal Reserve raises its target rate, that in turn causes market participants to immediately demand a higher % rate of return. This means for the same asset producing the same amount of rent, if the rate of return demanded is higher, the asset’s market price is then discounted as a result. At the same time, the current rate hike is coupled with inflation, which leads to increases in wages and rents, which will likely offset some of the adverse impacts of rate hikes.

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

The multifamily market enjoyed the strongest Q1 absorption in more than two decades, leasing up 96,500 units during the quarter. Typically, the first quarter is seasonally a slow quarter, however, strong pent-up demand in the sector overcame that trend. The continued robust demand for multifamily housing was fueled by a number of factors, including: increased household formations coming out of COVID, job and wage growth due to economic strength and inflation, as well as ever-increasing home prices which drives residents into rental apartments.

The overall multifamily vacancy rate in the U.S. fell to a record-low of 2.3%. This is a compression of 0.2% quarter-over-quarter from Q4, and 2.5% year-over-year from last year’s Q1. This is going to give our property managers the ability to push rents even more aggressively on renewals and new leases.

During the pandemic, the spread in vacancy rates among Class A, Class B, and Class C properties expanded widely compared to historical ranges. Since Class A properties are largely located within more densely populated city centers, many renters escaped those areas to lower density cities, which tended to be mostly Class B and C properties. Many employers during the past two years also allowed workers to work remotely from these Class B and Class C locations, even while these companies maintained their office in the city centers, further supporting the flight to Class B & C. However, in the second half of 2021 we saw a sharp reversion as more companies brought employees back into the office, and the general pandemic concerns subsided. By Q4 2021 and continuing into Q1 2022, the spread now seems to be more “normal” given historical trends, with Class A vacancy rate being approximately 0.5% higher than Class B, and Class B vacancy rate being approximately 0.5% higher than Class C. That said, all three classes of multifamily individually continued to break new lows each quarter.

As a result of historically low vacancy and high inflation rates, average rents increased by 2% quarterover-quarter and 15.5% year-over-year. While this is the trend observed across the country, we operate each of the properties in the portfolio based on its own unique aspects including its location, tenant base, size of units, amenities, etc. At each property, the Fund generally instructs our property managers to prioritize rent growth, both for the purpose of increase rental income as well as potential sale price at exit. However increasing rents too aggressively above what the market can bear, can cause vacancy to rise at the property, which creates a loss of income and negatively impacts future sale price. Therefore, it is a delicate balance we maintain by constantly monitoring rents and vacancy, as well as each individual property’s competition in its submarket.

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

In the first quarter of 2022, commercial retail market continued to recover. Not surprisingly, in-store sales saw higher increase than online sales as consumer behavior somewhat shifts spending back to physical retail stores. The fear of inflation and potential recession curbed consumer confidence, but nonetheless, strong wage growth and inflation drove overall retail sales up. Not surprisingly, sales of gasoline spiked due to heightened demand and the conflict in Ukraine. Restaurants and bars also saw large increases along with other in-store retailers.

Another point worth noting, is that during the past 2 years, there was minimal new construction of retail properties across the country. This kept the total supply of available retail units, which helps to maintain retail property rent levels.

While the retail sector is not the most critical focus of the Fund, it is important to maintain some diversification. Therefore, retail exposure is kept fairly low in our portfolio, and limited to only certain specific markets.

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

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