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 potential 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.” However, it is also noted that “the industry is still on a knife’s edge.” Multifamily appears to be holding strong while office remains unchanged from the 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
The metrics indicate national average vacancy rates remain at 5%, with construction delivery slowed by inflationary pressures and increased financing costs. Net absorption had ticked up due in part to continued job market strength combined with slowing single-family housing activity; however rent growth was marginally higher but not near double digits reported at peak 2022 levels – close instead pre-pandemic level numbers.
Office: Little Changed, Still Stressed
Office construction has significantly slowed due largely underutilization caused by American workers coming into offices only half as frequently compared 2019 levels – resulting in an average national vacancy rate uncomfortably close its historical peak during 1991 Savings & Loan Crisis (18.9%). Economic uncertainty further contributes making demand unstable remaining negative territory according experts Chen & LaSalvia .
Retail: Buoyed by Consumer Confidence
Despite being hammered ecommerce/COVID restrictions/lockdowns surprisingly strong pent up consumer demand brought opportunity turn corner neighborhood/community shopping center performance improving though sluggish construction delivery keeping vacancy level same pre pandemic 10%. Asking effective rents slightly increasing quarter over basis per experts’ observations .
