Rising occupancy rates continued to fuel the commercial real estate market in October.
Commercial Real Estate Market Recovery Moved in Right Direction in October
According to the National Association of REALTORS (NAR)®, the commercial real estate market recovery is being spurred by an improving economy and rising occupancy rates.
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NAR’s October Commercial Market Insights Report focuses on the office market, the multifamily sector, the industrial market, retail space in secondary metros and the hotel sector.
Occupancy jumped an additional 1.8M square feet on a quarterly basis as of October 23. October’s additional 1.8M square feet is on top of the quarterly increase of 8M square feet in September. Occupancy increases were primarily experienced in secondary/tertiary office markets.
That being said, the office market recovery still has a long way to go since 128.4M square feet of office space has been released since Q2 2020.
Rent growth in the primary office markets of New York, Chicago, San Francisco and Washington DC continued to decline as of October 23. These primary office markets also have 139.7M square feet of office space currently under construction so expect rent growth in these cities to remain essentially flat. Likewise, expect vacancy rates to remain above 10% in these gateway cities.
Approximately 44% of tech/mathematical workers continued to work from home through October 23. Justifiably so, a hybrid work style appears to be the emerging dominant work style for office-using workers. The office market requires developers and landlords to be patient about the absorption of vacant office space over time.
Demand for the multifamily sector within commercial real estate continued to remain strong in October. The net absorption of 1.06M apartment units since Q2 2020 was quite positive as of October 23, 2021
Asking rents continued to increase +11.4% y/y. Because the level of construction of new apartment units declined compared to pre-pandemic levels, it’s likely that rents will continue to remain about +10% in 2022 while vacancy rates are expected to drift below 5% next year.
The industrial market is a strong limb within the commercial real estate market. Some 654M square feet has been absorbed since Q2 2020 and asking rents for industrial spaces have increased +7.6%. Demand for industrial space has buoyed new construction to higher levels than pre-pandemic construction. Even with higher new construction levels in this sector, demand is likely to keep vacancy rates below 5% in 2022.
Demand for industrial space to support online sales is particularly strong, up by +17%.
Secondary metro areas in the Sunbelt of Texas, Arizona, Georgia, and Florida are seeing both increased construction activity and absorption rates of retail space rise. Why? These metro areas continued to attract in-migration from less affordable areas and states around the country.
Occupancy and revenues were higher as of October 23 than they were during pre-pandemic times. The average 3-month hotel vacancy rate during October was 62.5%, up from 55.3% during the same period on year ago due to the Delta variant case surge during the summer.
Overall Outlook for Commercial Real Estate Market
NAR’s October Commercial Market Insights Report indicated that the commercial sector had “finally turned a corner.” Fingers crossed there will be no big resurgence of the Delta variant, there will be an improving economy, the now lifted ban of international travel will remain in place and there will more business/personal travel and recreation.
If all that happens, NAR believes a sustained, steady recovery of the commercial real estate market will continue into 2022 and beyond. This report’s only caveat is that the office sector is expected to return to a 10% vacancy rate no earlier than 2024.
Thanks to the National Association of REALTORS®.