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By the end of the summer, the economy displayed increasing signs that the cooling effects of high interest rates were no longer needed. Inflation is approaching the 2% average target, while the labor market continues to slow down, growing at a slower pace than the previous months. With markets already responding to the anticipated rate cut from the Federal Reserve, commercial real estate is also experiencing the effects.
Demand for office space has improved, but additional supply has kept office vacancy rates at record highs. The retail sector remained tight due to limited new supply, while the industrial vacancy rate has steadily increased over the past couple of years, further decelerating rent growth for industrial spaces. Nevertheless, the multifamily sector continues to experience a robust rebound, with demand approaching the record-high levels seen in 2021.
Below is a summary of the performance of each major commercial real estate sector as of the end of the summer:
Office Properties
Although net absorption for the office sector remains in negative territory, demand for office space has improved. The surplus of unoccupied office space has dropped from nearly 59 million square feet a year ago to 35 million square feet in August 2024. Approximately half of the metro areas across the country saw an improvement in office net absorption compared to last year. Major markets such as the Texas Triangle – Austin, Houston, and Dallas – along with Philadelphia, Sacramento, San Diego, and Tampa successfully shifted net absorption into positive territory this year. However, the national office vacancy rate remained at record highs, with further increases in inventory recorded in August.
Multifamily Properties
Even though mortgage rates eased in August, the multifamily sector thrived as housing affordability strained. Net absorption doubled compared to the previous year, exceeding 530,000 units. However, despite this robust demand for rental units, elevated completions and units under construction have kept the multifamily vacancy rate near 8%, with rent growth holding steady at around 1% over the past year. Looking ahead, rent growth could increase next year as the pace of new deliveries is expected to slow.
Retail Properties
Retail space remains at historically tight levels, with less than 5% available retail space for lease for over two years. Demand continues to rise, further straining the market due to limited new supply. In the past 12 months, net deliveries totaled just over 33 million square feet – less than half the 10-year average. The sector's fundamentals are expected to remain tight with fewer retail spaces under construction and robust consumer spending.
Industrial Properties
The industrial sector continued to lose momentum in August. Net absorption was nearly 70 percentage points lower than a year ago, while rent growth decelerated significantly, dropping to 3.2% from 8.0%. With additional new supply, the vacancy rate rose 6.6% from 5.1%. However, further declines in inflation and interest rates in the coming months may boost demand for goods. This usually creates a ripple effect, increasing the need for industrial spaces to manage production, storage, and distribution.
Hotel Properties
As we continue into Q3 2024, the hospitality sector is maintaining stability. Hotel occupancy rates have leveled off at around 63%, remaining roughly 3% below pre-pandemic figures, which suggests that a complete recovery may be elusive due to the prevalence of remote work. Nevertheless, average daily rates and revenue per available room have now exceeded pre-pandemic benchmarks.
