Commercial Real Estate Market Update Q2 2023
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)
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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