November 18, 2022 Commercial by Ankush Agrawal

Q3 2022 Commercial Real Estate Overview

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