CRE Has Softened But Not Evenly

​Since the onset of the pandemic, the economy has gone through several cycles. While there has been some softening in many of the commercial real estate property types and markets, not everything is being affected the same way, according to a new video by Marcus & Millichap.

Its senior vice president and national director of business services, John Chang, said that most types of commercial real estate ebbed and flowed with the broader economy.

“In the relatively tight cycles, different property types saw space demand rise and fall very quickly,” Chang said. “But elevated inflation, tighter financial markets, and risks of a recession have begun to take a toll.”

The office market is still grappling with the residuals of the pandemic.

He said that new behavior patterns, including working from home, the hybrid work week, and people relocating to the suburbs or to entirely different cities from where their job is located have dramatically reduced the need for office space.

The overall national vacancy rate for offices in Q1 2023 was 16.8%, up from 12.7% in the first quarter of 2020.

“But not all markets have been affected in the same way,” Chang said.

The office vacancy rate in Miami stands at 11.8%, the same level it was in the first quarter of 2020.

Another market that has done well is Las Vegas, where the most current office vacancy rate is 12.4%, down 40 basis points from before the pandemic.

The market generating the best comparative results in West Palm Beach, where office vacancy now stands at 11.8%, down from 13% three years ago.

“There are some unique dynamics in each of these metros,” Chang said, “but my point is that even the hardest hit property type still has some pockets of well-performing assets.”

As for multi-tenant retail, when we went into the pandemic, many believed that a new death warrant had been signed on the retail sector, but retail properties demonstrated tremendous resilience throughout the health crisis, Chang said.

Today, despite highly publicized store closings such as Bed Bath & Beyond, retail is outperforming, according to Marcus & Millichap.

The national vacancy rate for multi-tenant retail is 5.6%, down 10 basis points from where the sector was in Q1 2020.

There are 24 different major markets across the country where the retail vacancy rate today is below where it was in the first quarter of 2020.

The apartment market has had its up and downs during the past three years.

In Q1 2022, the apartment vacancy rate hit a record low of 2.5%. It has since rebounded, climbing to a national average of 5.2%.

“That rise has been driven by a combination of elevated construction and slower household formation,” Chang said, pointing to three markets where the current vacancy rate is the same as it was in the first quarter of 2020: Miami, Milwaukee, and Orange County, Calif.

Four other markets are performing better today than they were in 2020, including San Diego, Chicago, New York, and Northern New Jersey.

Industrial properties also moved through cycles, reaching a record-low national vacancy rate of 3.6% in the second and third quarters of last year. Since then, the vacancy rate has risen to 4%, but absorption has been positive for 52 consecutive quarters.

“The rise in vacancy over the last six months has largely been driven by a construction wave,” according to Chang.

The average industrial rate in the first quarter of this year was better than it was in the first quarter of 2020 in 40 of the 48 major markets Marcus & Millichap tracks.

Self-storage has also performed well, with the national average vacancy rate down 80 basis points from 10.1% to 9.3%, and with 23 markets outperforming their pre-pandemic vacancy levels.

Self-storage has historically outperformed most property types during economic down cycles, “which makes this property type particularly attractive to investors when the broader economy faces increased risk,” he said.

On the flip side, hospitality properties tend to be more vulnerable to down cycles, but hotel demand has made a strong recovery from the health crisis.

The overall trailing 12-month hotel occupancy rate as of February 2023 was 63.3%, a bit lower than in February 2020 when it was 65.8%. The average daily rate, however, is almost 15% higher than it was in 2020.