How Five CRE Segments Have Fared Over Five Challenging Years

The past five years have been particularly challenging from a real estate perspective. “It’s almost as if we’ve navigated an entire real estate cycle in just a few years,” said Marcus & Millichap SVP of research services, John Chang, in a research video summarizing the performance of five CRE sectors over that period.

The office sector has had a particularly tough five years, he said. Average vacancy has surged 490 basis points from 2019 to 17.2%, reflecting increased remote work and reducing office-based demand.

“This has really affected large, older, urban office buildings in major metros, far more than smaller, newer suburban office properties in secondary and tertiary markets,” said Chang.

Meanwhile, the average apartment vacancy rate fell to an all-time low of 2.5% in the first quarter of 2022 and rebounded to 5.8% as of the second quarter of this year driven by 1.8 million new units added to the market. The apartment market also has experienced three-quarters of negative absorption on recession fears, said Chang.

The industrial story is similar to apartments with the vacancy rate reaching a record low of 3.6% in 2022 followed by a new supply-driven vacancy rise in the past five years as about 1.9 billion square feet of industrial space have been added.

Unlike other property types, storage got a significant demand boost from the pandemic, said Chang. From the second quarter of 2019 to the second quarter of 2021, the vacancy rate fell by 350 basis points to a record low of 5.5%, but since then, a combination of new supply additions and softening demand has pushed the vacancy rate back up to 8.9% as of the second quarter this year.

Finally, retail performance was almost the inverse of self-storage as the pandemic weighed on service categories like bars and restaurants. The average multitenant retail vacancy rate peaked in 2021 at 6.2% but it has since come down to 5.1% in the second quarter of 2024. A key contributor to the performance of multitenant retail has been very limited construction over the past five years, with only about 74 million square feet being added.

“Given how well commercial real estate performed through the particularly tumultuous last five years, I anticipate a promising outlook,” Chang concluded. “Despite a global pandemic, the worst bout of inflation in 50 years and a 500 basis point surge in interest rates, most commercial real estate is still ahead.”