Commercial Real Estate Market Update Q3 2023
Market Overview
The U.S. commercial real estate market in Q3 2023 saw investment volumes continue to decline, with a 54% year-over-year drop to $82 billion. Multifamily remained the most favored sector, albeit with a significant decrease in transaction volume to $29 billion, followed by industrial & logistics at $20 billion and retail at $15 billion. Los Angeles and New York continued to lead in market volume, though both saw considerable yearly decreases.
Cross-border investment decreased by 55% year-over-year to $3.4 billion, impacted by a strong U.S. dollar and rising interest rates. In terms of property prices, the RCA Commercial Property Price Index fell by 9% year-over-year, with multifamily prices decreasing the most at 13%, followed by office at 9% and retail at 7%.
Delinquency rates for commercial mortgage-backed securities (CMBS) rose to 4.40% in Q3, up by 30 basis points quarter-over-quarter. The NCREIF Property Index reported negative returns, with the office sector experiencing the most significant decrease at negative 17.1% annualized. Despite these challenges, private investors were net buyers, accounting for $51 billion or 62% of the total investment volume.
In the lending environment, the CBRE Lending Momentum Index indicated a slowdown in acquisition activity, falling by 3.0% quarter-over-quarter and 47.9% year-over-year. However, the rate of decline in Q3 suggests that lending activity may be nearing its trough. Loan spreads tightened for both commercial and multifamily loans, and banks remained the top non-agency lenders, followed by life insurance companies and alternative lenders. Multifamily agency lending increased to $29.8 billion in Q3, with a notable rise in mortgage rates. Loan-to-value ratios edged up for both commercial and multifamily loans. Loan constants and underwritten cap rates increased, indicating a cautious lending environment amidst economic uncertainties.
The commercial real estate market’s performance reflects the broader economic headwinds and a cautious approach from investors. High-interest rates and economic uncertainty continued to suppress investment activity, with particularly sharp declines in entity-level transactions and specific segments such as office properties. Despite these challenges, the commercial real estate market’s fundamentals are strong, supported by private investors’ continued interest and the resilience of key sectors like multifamily and retail. The sector’s future will depend on evolving market conditions, including interest rate trajectories and economic policies.
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)
U.S. Real Estate – Multifamily Market
In Q3 2023, the multifamily sector showed signs of moderation amid economic headwinds. Demand remained robust, with net absorption of 82,100 units, reflecting a rebound in seasonal demand. The overall vacancy rate nudged up to 5.1%, a slight increase reflective of high supply with 114,600 new completions. While this uptick in vacancy is a departure from the historical long-term average, the increase is equal to that of Q2 but less than that of Q1, suggesting a stabilization of supply-demand dynamics. Year-over-year rent growth decelerated to 0.7%, indicating a shift towards normalization of growth rates.
The investment volume for multifamily decreased by 8.5% quarter-over-quarter to $29.0 billion, maintaining its position as the dominant sector in commercial real estate investment. Despite the drop in investment volume, the sector has shown resilience with a 34% share of the total CRE investment volume, though well below the $75.8 billion from a year ago.
The market’s adaptability is evident, with multifamily investment still robust in the face of rising cap rates and interest rates. The prime multifamily going-in cap rate has increased by 155 basis points since Q1 2022, now standing at 4.92%. CBRE anticipates a slight potential increase in cap rates if the Federal Reserve’s interest rates continue to climb.
The market’s future will hinge on economic conditions and the Federal Reserve’s policy trajectory. However, the multifamily sector’s fundamentals remain strong, with a stabilization expected once the rate-hiking cycle concludes. The quarter’s data reflect a market in transition, adjusting to the post-pandemic landscape and shifting economic forces.
U.S. Multifamily Vacancy Rate and QoQ % Change ⇩
U.S. Multifamily Vacancy Rate by Class ⇩
U.S. Multifamily Monthly Rent and YoY % Change ⇩
U.S. Real Estate – Commercial Retail Market
The commercial retail market in Q3 2023 witnessed an increase in demand, with net absorption rising by 34% quarter-over-quarter to 9.8 million square feet, showcasing the sector’s recovery. However, total net absorption was only 52% of the 10-year quarterly average, indicating a market still stabilizing from pandemic impacts.
The overall retail availability rate decreased to 4.8%, the lowest level since 2005, with significant declines in the neighborhood, community, and strip center segments. Despite a challenging environment marked by store closures in the power center segment, leading markets like Orlando, Phoenix, Los Angeles, New York City, and Long Island saw robust absorption.
Construction completions in Q3 dropped to 5.6 million square feet, a 28% quarter-over-quarter decrease, continuing the trend of reduced new development due to high costs and tight lending conditions. Rent growth moderated, with asking rent growth falling to just over 2.1% year-over-year and quarter-over quarter growth falling below the long-term average, signaling a cautious outlook from landlords amid an economic slowdown.
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: U.S. Census Bureau, U.S. Chamber of Commerce, U.S. Department of the Treasury, U.S. Bureau of Labor Statistics, CBRE Research, CBRE Econometric Advisors, Bloomberg, Reuters, Schroders, WSJ.com, Zillow Group, Redfin, S&P Global, CNN Business, CBS News, World Economic Forum, The Conference Board & Deloitte Insights
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