CRE Bellwether Trends For H2

Looking at the midyear approaching, BGO Chief Economist Ryan Severino reviewed the first quarter and CRE trends coming out of it.

The “narrative for the U.S. commercial real estate (CRE) market remains largely unchanged,” he wrote. The economy continues to expand — the third estimate of 2024 Q1 GDP released on Thursday was revised slightly upward to an annualized 1.4% — “supporting generally healthy space market fundamentals, which are maintaining their general trajectory, both overall and within each property type.”

Things remain complicated. High interest rates continue to confound markets and many “are growing increasingly frustrated with the Fed and monetary policy.” Severino says that, overall, “the balance of risks still skews positive for CRE over the next 12-18 months.”

Not all property types are reacting similarly. “Industrial remains the darling of CRE and now stakes a claim as the bellwether property sector, a title formerly held by office,” he writes. “Because of this, many look to industrial as a gauge for the overall health of the CRE market.” That’s an interesting statement that, if correct, represents a subtle and significant shift in industry views.

The national industrial vacancy rate was up to 6.2%. Rent growth is slowing and currently an annual 5.9%, but still above inflation. A supply of new inventory is above the national net absorption. BGO still sees a positive outlook over the coming five years.

Retail has a current national vacancy rate of 4.1%, “just above its historical low and surpasses the vacancy rates of all other major property sectors by an average of 513 bps.” Rent growth has slowed but is at 3.3% annually. “The combination of low vacancy and healthy rent growth are quietly producing strong performance from the sector.” But it’s also the type most affected by “micro factors within a property’s trade area.” Again, a positive outlook. “While we foresee relatively little upward pressure on vacancy rates over the forecast horizon, the sector will struggle to maintain the outsized rent growth of the last few years.”

As GlobeSt.com has reported for a while, multifamily “surrendered its title as the darling of CRE.” It had been on a long run of strength since the global finance crisis and there is some slowdown now. The national vacancy rate was up 20 basis points in the first quarter. Unlike industrial, which has seen a widespread increase, multifamily vacancy increases depend heavily on location given how heavy increases in inventory have been tied to population growth areas like in the south.

Office remains “most challenged” of any property type. The vacancy rate reached a new high in the first quarter but asking rent growth has been flat. “Gradually, the market is adjusting to excess supply, particularly of older obsolete space,” Severino wrote. “That inventory adjustment process will likely unfold over a number of years. But as is often the case, it appears as if CRE market participants have overreacted to office’s plight.”