Much of CRE Is Moving Toward Greater Stability Says Moody’s

A Moody’s report has evaluated the steadiness of multifamily performance, continued but not increased stress in office, a fall in retail vacancy, and a cooling of industrial sector.

After the highs and lows of the last few years, this sounds like a big reversion to perhaps what is a new mean. Overall, the September rate cut by the Federal Reserve brought “expectations of continued relief” that Moody’s expects to continue forward — although Fed Chair Jerome Powell has continued to stress decision-making based on data and no hurry to quickly slash rates. The prospect of an economic soft landing has continued to rise this year. However, a new normal will take time and a greater amount of recent economic and financial history to ascertain.

Multifamily vacancies remained at 5.8%, 91 basis points higher than the 2010-to-2019 average. Moody’s says the rate is the highest since 2011 when the country was coming off the global financial crisis and crash of the U.S. housing market. Since late 2022, the main driver of vacancy was supply-side pressure. As construction of new units continued, especially in growing areas of the South and West, the supply increased passed what demand could absorb.

The national asking rent at the end of the third quarter was $1,845 per unit. That’s still $5 lower than a year ago. Marginal increases over two quarters still leave some losses from 12 months back that need more time for income to recover. Class-A construction — an emphasis developers have made to ensure they could get high enough rent to cover increased costs and still leave some profit — has helped prop up asking rents.

Office vacancy was 20.1%, rising from 16.8% in 2019 Q4 as work-from-home reduced demand. But it was flat quarter-over-quarter after four consecutive quarters of vacancy increases. It may move upwards going forward, but that is difficult to tell. Higher vacancy rates in office in the past came with weaker labor markets, and they have been strong.

The retail CRE market had demonstrated a longstanding rate of 10.4%, but it shifted downward to 10.3% in Q3. Asking rents rose 0.3% to $21.85 per square foot while effective rents rose by 0.4% to $24.87 a square foot. The performance of retail businesses that lease the properties is critical. Lower interest rates may increase consumer confidence, but accumulated price increases during high inflation can push back, especially on parts of the population that haven’t seen strong enough incomes to find a way to manage. Retailers will have to watch pricing to keep from pushing customers away.

As for industrial, vacancy rates dropped by 10 basis points to 6.7%, the first decline in two years. New construction starts in the market have slowed, helping to reduce vacancies by slowing the addition of new supply. Still, the rate is “well below pre-pandemic averages.” Asking rent growth was up by 0.6% and effective rent was up by 0.7%. That’s the first growth since 2023 Q2, though well below the pandemic highs.