Commercial Real Estate Market Update Q4 2023
Market Overview
U.S. commercial real estate investment volume continued to decline, falling 44% year-over-year to $81 billion in Q4 and $348 billion annually, leading to the lowest annual total since 2012. Multifamily continued to lead all sectors with $26 billion in investment volume, followed by industrial & logistics at $19 billion and office at $14 billion. New York and Los Angeles led in annual investment volume, emphasizing the enduring appeal of major markets despite overall declines. Cross-border investments saw a decrease of 30% year-over-year to $4.7 billion inflows in Q4, reflecting the challenges faced in the global investment landscape.
The annualized total return of the NCREIF index, which tracks the performance of core institutional property markets in the U.S., declined to -7.9% in 2023 from 5.5% in 2022. This downturn reflects broader market challenges, particularly for office properties, which saw the most significant year-over-year decrease, with returns plummeting 14 points to -17.6% annualized. These figures highlight the varying performance across different property types and the resilience of hotel assets in the current environment. Hotels alone showed a positive annualized return of 10.3%.
The financing environment showed signs of cautious optimism in Q4. CBRE Lending Momentum Index, which tracks the pace of CBRE-originated commercial loan closings in the U.S., marked its first quarterly increase since Q1 2022 by 1%, though it remained 38.1% lower than the same quarter last year. Banks emerged as the most active non-agency lenders, accounting for 39.5% of Q4 loan volume. Multifamily agency lending decreased to $27.1 billion in Q4, influenced by higher average mortgage rates and the FHFA’s 2024 purchase volume caps.
Despite a challenging investment climate, the commercial real estate market in Q4 2023 showed resilience in sectors like multifamily and industrial logistics. High-interest rates and economic uncertainties continued to impact investment decisions, with a notable shift towards cautious lending and investment strategies. As we move forward, the focus remains on navigating the evolving market dynamics, with an emphasis on sectors showing strong fundamentals and adaptability to the changing economic landscape.
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 Q4 2023, the U.S. multifamily market endured a challenging environment involving an uptick in vacancy rates and an unprecedented surge in new completions. During the period there were 140,900 newly completed units, pushing the annual total to a record of 416,500 units, indicating robust construction activity alongside vibrant housing demand. However, this high demand was still unable to keep up with the record supply of new units, with the vacancy rate rising by a modest 20 basis points to 5.4%.
Average monthly rent declined slightly by 1.2% from the previous quarter to $2,166/unit nationwide, with a slight annual growth rate of 0.4%. This trend suggests a market recalibration amidst the influx of new supply, with expectations of stabilized rent growth in the near term.
Investment volume in Q4 totaled $25.7 billion, contributing to an annual figure of $117.5 billion, which represents a 60% decrease from 2022. Despite the downturn, multifamily retained a significant share of commercial real estate investment volume, underscoring its continued appeal to investors. The sector’s performance reflects a cautious yet strategic approach to long-term housing demand and market dynamics.
As the multifamily market moves forward, the balance between supply and demand, alongside investment trends, will be critical in shaping its trajectory. The market’s fundamentals, characterized by robust absorption and a slight moderation in rent growth, suggest a resilient sector poised for steady performance amidst evolving challenges and opportunities.
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 the U.S. demonstrated notable resilience in Q4 2023. Net absorption reached 12.5 million square feet, bringing the annual total to 40 million square feet, with Texas markets, especially Dallas-Ft. Worth, leading in net absorption. This robust performance highlights the sector’s recovery and the strategic demand for retail spaces.
The overall retail availability rate continued to decline, hitting a historic low of 4.7%, with significant tightening in neighborhood, community, and strip center segments. This tightening reflects a growing consumer preference for convenience and locality, driving demand for strategically located retail spaces.
Construction completions were at record lows due to high costs, with Q4 seeing only 5.3 million square feet completed. On the other hand, average asking rents increased to $23.76 per square foot, indicating a healthy demand for retail spaces and the market’s ability to sustain rental growth amidst limited new supply.
Closing Q4 2023 on a strong note, the outlook for U.S. retail market remained cautiously optimistic, underscored by record-low availability rates and steady net absorption, suggesting continued demand for retail spaces, especially in economically robust markets. The sector is facing a construction slowdown, pressing for innovative solutions to match market demand despite the inflating costs.
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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