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September brought positive news for the Commercial Real Estate (CRE) market as the Federal Reserve took steps to ease economic pressures by lowering interest rates by 50 basis points. This decision was highly anticipated by the industry, who welcomed the move as it offers potential relief for borrowing costs and financing conditions in the market. With additional rate cuts on the horizon, there is growing optimism for more favorable market conditions in the months ahead across the CRE sector. While demand for office space is improving with net absorption turning positive, additional supply continues to keep vacancy rates at record highs. In the retail sector, tightness persists due to limited new supply, whereas industrial vacancy rates have steadily risen, leading to a slowdown in rent growth for industrial properties. Meanwhile, the multifamily sector continues to experience a strong rebound, with demand nearing the record high levels seen in 2021.
Below is a summary of the performance of each major commercial real estate sector at the end of the third quarter of the year.
Office Properties
After over two years of negative office net absorption, the office sector saw positive net absorption in the third quarter. While many companies embraced remote work, some have gradually shifted back to in-person work. Although the increase was incremental, office spaces leased outnumber those vacated in the year’s third quarter. Over half of metro areas now report higher net absorption than a year ago. Net absorption has turned positive in markets like Philadelphia, Dallas, Austin, Sacramento, and Houston, with more than 1 million square feet of office space leased than vacated. However, the office space sector still faces a long way to go for a full recovery. The national office vacancy rate remains at record highs and could increase further.
Multifamily Properties
The multifamily sector continued its strong performance even though mortgage rates eased in September, nearing the 6% threshold. 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 exceptionally tight, with available space for lease consistently below 5% over the past couple of years. Demand continues to grow, adding pressure to the market. Particularly as new supply remains limited. In the past 12 months, net deliveries totaled just over 32 million square feet – about 40% below the 10-year average. With fewer retail spaces under construction and strong consumer spending, the sector’s fundamentals are expected to remain tight. Additional rate cuts by the Federal Reserve are expected to boost household confidence, supporting further consumer spending.
Industrial Properties
The industrial sector continued to lose momentum in September. Net absorption was nearly 60 percentage points lower than a year ago, while rent growth decelerated significantly, dropping to 3.0% from 7.9%. With additional new supply, the vacancy rate also rose to 6.6% from 5.1%. However, further declines in inflation and interest rates in the coming months may boost demand for goods and the volume of projects that were previously shelved or halted during construction. This usually creates a ripple effect, increasing the need for industrial spaces to manage production, storage, and distribution.
Hotel Properties
As Q3 2024 concludes, the hospitality industry remains stable. Hotel occupancy rates are holding at around 63%, about 3% below pre-pandemic levels, indicating that a full recovery may be challenging due to the rise of remote work. However, average daily rates and revenue per available room have now surpassed pre-pandemic figures.
