There is little doubt that the commercial real estate sector continues to face headwinds. The combination of decreasing office utilization, retail challenges and apartment demand erosion has led the Board of Governors of the Federal Reserve System to highlight commercial real estate as a possible economic risk trigger.
Just-released Q2 2023 preliminary multifamily, office and retail data from Moody’s Analytics supports commentary that “the worst fears have yet to ring true.” At the same time, it suggests that “the industry is still on a knife’s edge.” Multifamily appears to be holding strong while office remains unchanged from previous quarter; meanwhile Moody’s Analytics Senior Economist Lu Chen and Head of CRE Economics Thomas LaSalvia suggest “retail is in it for the long haul.”
Multifamily: Still OK
Moody’s metrics indicate national average vacancy rates remain at 5%, with construction delivery slightly slower than expected due inflationary pressures and increased financing costs. Net absorption has ticked up however supported by continued strong job market & slowing single-family housing activity. Quarter-over-quarter rent growth was marginally higher but nowhere near double digit numbers reported at peak 2022; Chen & LaSalvia note rent growth close pre pandemic level .
Office: Little Changed, Still Stressed
It comes as no surprise construction slowed significantly given underutilization continues issue – American workers coming into work only half as frequently compared 2019 due overall economic uncertainty creating unstable demand continuing bump along negative territory according Moody’s experts . Average national vacancy stands uncomfortably close historical peak 19% during Savings & Loan Crisis 1991 per LaSalvia/Chen report .
Retail: Buoyed by Consumer Confidence
Though sector hammered growing ecommerce/COVID restrictions/lockdowns surprisingly strong pent up demand brought opportunity for performance turn corner neighborhood community shopping centers improving , construction delivery remaining sluggish resulting vacancy levels standing pre pandemic 10%. Asking effective rents increasing slightly quarter over quarter basis per report findings .
