Industrial and Office Both Slow, But for Very Different Reasons

As the economy shifts and dynamics in business needs alter, so do results for commercial real estate. One recent analysis compared office with industrial as a second added more information on office.

Both are softening, but for different reasons, and the prospects for office are worse, as anyone in the industry might guess given the abundance of information and analysis that have already come out.

According to Colliers, while both industrial and office sales have been softening, the former has been stronger than the latter in 13 of the last 15 quarters. “Prior to that, industrial had never topped office in any quarter, per data from MSCI. Office is in the headlines of late, and much of the press is negative, creating a tremendous opportunity for risk capital willing to deploy.”

Vacancies of both will likely increase in 2023, but industrial has softened because of more inventory coming online and occupancies are still robust, with gains in the recent quarter well above pre-pandemic levels. Rents have also seen growth in industrial, up 27% over 12 months. The rent growth will slow with increased supply.

At the end of the first quarter, office vacancies at 16.1% were 20 basis points short of  the record level. The difference is that office has fallen off because of demand, not increased supply. Asking rents have held at high levels, but tenants are claiming significant concessions, including rent and communications packages, so effective rents are dropping.

From Transwestern comes an additional view of office. Delinquency rates are on the rise, from 1.6% at the end of 2022 to 2.9% at the end of the first quarter of 2023. Net absorption was negative in direct lease and sublet space, “with only 14% of markets managing positive net absorption for both the quarter and the trailing 12-months.”

Transwestern showed a different vacancy rate for office of 13.4% (a product of different data sources) than Colliers, but that was up 50 basis points in the first quarter. The average asking rent of $26.27 in Q1 showed 1.4% year-over-year growth, which is a deceleration of trends.

One potential reason for the results according to Transwestern were the quarterly job cuts in information, finance, and employment services, all heavy users of office space. “Despite rising 18.2% in March 2023, office-using job postings (companies looking to hire) are down 33.6% YoY as companies pulled back on hiring in the face of inflation and higher interest rates,” the firm wrote.

Meanwhile, Transwestern’s look at industrial showed vacancy rates of 4.2%—above 4% for the first time since 2021 but still below the 20-year average of 7%. Asking rents of $8.45 show record quarterly and annual growth. A 50% or more drop of construction starts will help strengthen rents.