Commercial Real Estate Market Summary End of 2024
Offices, Industrial, Multifamily, and Capital Markets
The commercial real estate market continues to face significant challenges across various sectors, with underperformance in offices, stabilization in multifamily, resilience in the industrial sector, and a slight improvement in capital markets. Below is a summary of each of these markets based on the latest data from Moody’s Analytics and other specialized sources.
Office Market: Ongoing Challenges
The office sector remains the biggest challenge in the commercial real estate market. In the last quarter, offices recorded a record vacancy rate of 20.1%, reflecting low demand that has persisted since the onset of the pandemic. While asking rents have shown slight growth, effective rents continue to decline due to concessions aimed at incentivizing occupancy. According to Moody’s, this negative trend is expected to last at least another six to eight quarters.
However, cities like Miami and Nashville have outperformed, with occupied space growing by 5% and 14%, respectively, since 2019. These markets have emerged as leaders due to their lower cost of living, which attracts talent from other areas. The Class BC office segment, especially in suburban areas, has been the hardest hit due to its obsolescence and lack of investment in renovations.
Industrial Sector: Maintaining Strength
While the exponential growth of the industrial sector has slowed, it still shows a vacancy rate of 6.5% in warehouses and 6.3% in flex/R&D spaces. This segment, driven by the rise of e-commerce and investment in manufacturing, has managed to maintain stable growth. However, the pace of this growth is decreasing, partly due to the completion of new projects that started during the pandemic boom.
Despite the slowdown, the sector continues to benefit from trends like reshoring and near-shoring, which are driving demand for industrial spaces.
Multifamily Market: Stabilization After the Boom
The multifamily market has seen an increase in the vacancy rate to 5.7%, surpassing the peak during the pandemic in 2021. This is mainly due to an oversupply following the boom in new apartment construction. However, market fundamentals remain strong, with an increase in household formation and a decrease in single-family home transactions. Effective rents have begun to rise again, with 60% of markets showing positive growth in the second quarter of 2024.
Capital Markets: Signs of Recovery
A positive note in the overall outlook is that commercial capital markets are finally showing signs of recovery. According to Kevin Fagan, head of capital markets at Moody’s, we’ve entered a "pre-recovery" phase. Transactions have started to grow again after seven consecutive quarters of decline, and the volume of loans is expected to rise by the end of 2024.
This gradual return to normalcy is reflected in a 9% increase in transaction volume in the last quarter, with sectors like industrial, offices, and hotels showing positive growth. While we are still far from pre-pandemic levels, these indicators suggest that the market is stabilizing.
In summary, commercial real estate faces an uneven recovery, with the office sector struggling to recover while the industrial and multifamily sectors show signs of stabilization. Capital markets, on the other hand, offer a glimmer of hope for further recovery in the coming quarters.
Sources: Moody's Analytics, Placer.AI
