Amid an improving economy, the commercial real estate market continues to recover, marked by rising occupancy across all commercial property markets, according to the October Commercial Market Insights Report.
In the office market, occupancy increased by another 1.8 million square feet on a quarterly basis as of October 23, following a quarterly increase of 8 million square feet in September. However, the recovery process has a long way to go, with 128.4 million square feet of office space released back to the market since 2020 Q2. Secondary/tertiary markets are leading the recovery as office rents continue to decline in the primary markets of New York, Chicago, Washington DC, and San Francisco. With 139.7 million square feet of office space under construction, expect rent growth to remain flat in the primary gateway cities to no more than 2% and vacancy rates to stay at above 10% in 2022. The fraction of workers working from home continues to decline but about 44% of tech/mathematical workers are still working from home so the absorption of the vacant space will take time as hybrid work style seems to be the emerging as the dominant work style for office-using workers.
Multifamily demand remains robust, with positive net absorption of 1.06 million apartment units since the second quarter of 2020 and asking rents rising further to 11.4% year-over-year on average across 390 markets tracked by CoStar®. Meanwhile, the level of construction has declined compared to the pre-pandemic level, indicating that rents will continue to remain above 10% in 2022 and vacancy rate likely hovering at below 5%.
The industrial market is another strong leg of the commercial real estate market, with 654 million square feet of industrial space absorbed since 2020 Q2. Asking rents are now up 7.6%. It is the only sector where construction is higher compared to pre-pandemic level. The demand for industrial space to support online sales which now accounts for about 17% of retail sales, will boost demand and keep vacancy rates at below 5% in 2022.
While non-store retailers are making inroads into brick-and-mortar retail sales, secondary metro areas in the Sunbelt of Texas, Georgia, Florida, and Arizona are seeing an absorption of retail space and construction activity. These are states that are attracting in-migration due to relatively affordable housing prices compared to the primary metro areas of New York, Boston, Washington DC, San Francisco, or Los Angeles.
Hotel occupancy and revenues are higher now compared to pre-pandemic levels although the surge in Delta variant cases during the summer held back somewhat the recovery. The average 3-month hotel vacancy rate during October was 62.5%, up from 55.3% in the same period one year ago.
Outlook
In a nutshell, the commercial real estate market has turned a corner. Assuming there is no big resurgence of the Delta variant, improving economic conditions, the lifting of the international travel ban in the coming months, and more business and personal travel and recreation in the coming months, current indicators point to a sustained recovery of the commercial real estate in 2022 and beyond, but the office market will likely return to 10% vacancy rate no earlier than 2024.
Source: “Commercial Real Estate Recovery Continues to Gather Steam in October 2021“
