Pivoting through record office vacancies and resilient industrial growth, the U.S. Commercial Real Estate Insights Chartbook for November 2024 reveals critical market trends and future outlooks.
In the U.S. commercial real estate landscape as of November 2024, you're seeing a multifamily market where national advertised asking rents have dropped to $1,744, yet still reflect a 0.9% year-over-year increase. This modest growth is consistent across the year, with 16 of the top 30 metros posting positive rent growth, led by New York City with a 5.0% increase.
In contrast, the office sector is grappling with a record vacancy rate of 19.4%, largely due to the ongoing impact of remote and hybrid work models. Office listing rates stand at $32.79 per square foot, up 3.3% year-over-year, but the market is divided between premier and lower-quality assets, with the latter facing higher vacancy rates and declining demand.
Industrial and retail sectors show resilience, with industrial in-place rents increasing by 6.8% year-over-year and core retail sales rising by 2.9%.
The hospitality industry is gradually recovering, with a U.S. hotel occupancy rate of 67.3% in October, up 2.3% from 2023. Transaction volumes, however, remain subdued due to high interest rates and limited capital availability.
For a more thorough exploration of these trends, including future outlooks and detailed statistical analyses, continuing to explore these insights will provide an all-encompassing understanding of the current and anticipated market dynamics.
As the U.S. multifamily market navigates the aftermath of a robust construction boom, signs of recovery and stabilization are becoming increasingly evident. National advertised asking rents for multifamily units dropped by $5 in November to $1,744, yet still managed a 0.9% year-over-year increase, indicating a steady market.
Vacancy rates, which had been high due to the building boom, are now stabilizing. According to recent data, national vacancy rates hover around 6.6%, a slight dip from recent peaks. This stabilization is partly due to high demand, with over 1.2 million new units filled since 2021.
Tenant preferences play an essential role in this market. The 2024 NMHC and Grace Hill Renter Preferences Survey reveals that renters prioritize practical features such as in-unit washer/dryers (93%), air conditioning (93%), and high-speed internet access (90%). These preferences highlight the need for multifamily properties to focus on everyday needs and amenities that enhance quality of life.
Looking ahead, the supply of new units is expected to slow down considerably, with around 672,000 new units projected for completion by the end of 2024 and only 336,000 in 2025. This reduction could lead to tighter rental conditions and greater pricing power for landlords, potentially impacting the affordability of housing.
As you assess the current market conditions in the industrial sector, you'll notice that national industrial in-place rents averaged $8.22 per square foot in October, marking a 6.8% year-over-year increase, while 358.8 million square feet of industrial space were under construction, representing 1.8% of the total stock.
Looking ahead, future demand drivers are expected to be influenced by interest rate cuts, which could bolster sales activity and leasing momentum. With strong retail sales figures, such as the 1% increase in July, consumer demand is likely to continue supporting industrial space absorption, particularly in markets like Dallas-Fort Worth, Houston, and Phoenix, where absorption has been robust.
Experts predict that the industrial market will stabilize and potentially recover considerably by 2025, driven by improving economic conditions and softer delivery numbers, with net absorption expected to double and vacancy rates remaining below pre-pandemic averages.
The U.S. industrial real estate market is maneuvering a period of significant change, with several key indicators pointing to a shift in market dynamics. As of October 2024, the national industrial vacancy rate has increased to 7.2%, a 20 basis point rise from September, indicating a slight softening in the market.
Despite this, investment opportunities remain robust. Industrial in-place rents have averaged $8.22 per square foot, marking a 6.8% year-over-year increase. This growth is particularly pronounced in Miami, where rents have surged 11.0% year-over-year, one of the few instances where a market outside Southern California has led the nation in rent growth.
Market stabilization is anticipated as interest rate cuts are expected to bolster sales activity. Through October, industrial sales totaled $49.2 billion, with properties trading at an average of $129 per square foot. While total sales volume is down by $1.1 billion compared to the same period in 2023, experts predict that 2024 will likely outpace 2023 in sales volume by year-end.
The construction pipeline also reflects this shift, with 358.8 million square feet of industrial space under construction, equal to 1.8% of the total stock. However, higher interest rates have led to fewer new construction starts since fall 2023, and project completions are projected to hit 10-year lows by late 2025.
Future demand in the U.S. industrial real estate sector is being driven by several key factors, including the ongoing integration of automation and artificial intelligence. AI-driven automation is optimizing operational efficiency, enhancing tenant experiences, and improving returns on investment. For instance, AI platforms provide real-time insights on design, cost, and constructability, allowing developers to accelerate project delivery timelines and streamline tasks such as facilities management and financial reporting.
Sustainability initiatives are also a significant driver. Industrial developers are increasingly focusing on reducing the environmental impact of their properties through energy efficiency, waste management, and innovative transportation strategies. For example, some industrial facilities are measuring the carbon output of delivery vehicles and adapting to electric vehicles for last-mile deliveries, contributing to green certification and broader corporate sustainability goals.
Demographic shifts, including population growth and urbanization, are reshaping industrial property demand. Areas with high population growth, such as Dallas, Houston, and South Florida, are seeing a surge in large-scale distribution center construction. Urban density growth is driving demand for smaller last-mile warehouses and fulfillment centers, particularly as e-commerce continues to expand. Additionally, an aging population and the dominance of millennials in the workforce are prompting the integration of advanced technologies and attractive amenities in industrial facilities.
Retail real estate fundamentals are poised to remain strong in 2024, driven by several key factors. Core retail sales have risen 2.9 percent in the first five months of 2024 compared to the same period in 2023, with significant gains in foot traffic for restaurants, supermarkets, discount stores, and fitness centers, ranging from 5 to 9 percent year-over-year.
The impact of e-commerce continues to shape consumer behavior, with e-commerce sales accounting for 16.2% of total retail sales in the third quarter of 2024. This shift emphasizes the need for retailers to innovate and adapt their physical spaces to complement their online presence, focusing on experience-driven purchases and personalized interactions.
Rental trends indicate a strong labor market, with 1.24 million jobs added over the first five months of 2024, supporting households' buying power and fueling demand for retail space. Location preferences are shifting towards open-air suburban retail centers and smaller, urban retail spaces that offer unique experiences and cater to localized clientele.
Effective tenant retention strategies, such as offering flexible lease terms, rent incentives, and renewal incentives, are essential in maintaining strong tenant demand. Market competition remains robust, with record-low availability rates and strong rent growth, although rent growth is expected to moderate to around 2% annually due to forecasted moderation in consumer spending.
Property valuations are relatively stable, with retail showing low price volatility compared to other commercial real estate assets, attributed to the sector's adaptation to past challenges and its "pressure-tested" resilience.
As you move from the robust retail sector to the office market, you'll notice a stark contrast. The office sector continues to grapple with significant challenges, highlighted by a record vacancy rate of 13.6% as of early 2024, and even higher at 19.6% by the end of 2023.
Remote work has been a pivotal factor, with 11.7% of U.S. job postings remaining remote from January to June 2024, although this is a slight decline from the 13.66% in 2022. This shift has led to substantial space givebacks, with companies returning over 65 million square feet of office space in 2023, contributing to a total of over 180 million square feet since 2020.
Occupancy rates vary by metro area, with cities like Houston and Chicago showing higher return-to-office rates compared to Philadelphia and San Francisco. As companies mandate more in-office days, occupancy rates are expected to improve, but this will depend on economic conditions and business confidence.
Tenant retention and lease negotiations are critical, especially as newer, better-equipped properties attract tenants, while older buildings suffer higher vacancies. Space utilization and adaptive reuse strategies are being explored, along with technology integration to enhance office attractiveness. However, zoning regulations and ongoing economic uncertainty complicate these efforts, making the office sector's future outlook cautious at best.
In the hospitality industry, a gradual recovery is underway, driven by increasing travel demand and a resurgence in business travel. Despite elevated inflation, households continue to prioritize spending on leisure travel and experiences, while business trips and international visitations are also improving, helping hotel occupancy approach pre-pandemic norms.
As of October 2024, the U.S. hotel industry reported an occupancy rate of 67.3%, a 2.3% increase from the same month in 2023. The average daily rate (ADR) rose to $164.86, a 1.8% increase, and revenue per available room (RevPAR) climbed to $110.94, a 4.1% increase.
Key markets like New York City have been particularly robust, with an occupancy level of 91.0% in October 2024, boosted by major events such as the United Nations General Assembly and the U.S. Open. The tourism recovery is also reflected in the forecasted 2024 occupancy rate, expected to hit 63.6%, only 3.4% short of 2019's level, with guest spending predicted to reach a record high of $758.61 billion.
These trends indicate a robust tourism recovery, with group business and meetings contributing considerably to the sector's rebound. As labor pressures ease and operational efficiencies improve, investor and lender confidence in the hospitality sector is being restored.
Transaction volumes in the U.S. hospitality sector have been marked by significant variability, reflecting the industry's uneven recovery. As of Q3 2024, the overall commercial real estate (CRE) transaction activity continued to decline, with a 9.9% drop in property count and a 9.6% decrease in transaction value compared to Q3 2023.
In the context of transaction dynamics, the CRE market has been subdued, influenced by high interest rates and limited capital availability. The first quarter of 2024 saw a 28% decline in transaction volume compared to Q1 2023, with the total volume reaching $31.6 billion, the lowest level since early 2013.
Pricing strategies have become increasingly critical in this environment. With declining values and pricing uncertainty, investors are adopting more flexible and strategic approaches. For instance, offering incentives such as flexible lease terms or reduced closing costs can make properties more attractive to buyers. Richard Barkham, global chief economist at CBRE, notes that recent drops in the 10-year Treasury yield and the Federal Reserve's signals of potential interest-rate cuts could boost transaction volumes in 2024, although this is expected to be modest, with a projected 5% year-over-year decline.
These trends highlight the need for adaptive pricing strategies that consider market conditions, customer preferences, and the unique value propositions of each property.
As you navigate the U.S. commercial real estate landscape in November 2024, it's clear that the market is a complex tapestry, woven with both challenges and opportunities. The multifamily sector sees absorption rates 30% below 2021 highs, yet still robust at 240,000 units year-to-date. Industrial vacancies rise to 6.6%, while office vacancies hit 19.4%, and retail sector tightness persists. The hospitality industry stabilizes with a 63% occupancy rate, just 3% below pre-pandemic levels. Transaction volumes, though below pandemic-era highs, show quarter-over-quarter price growth in several sectors, including a 3.8% increase in office prices. As the market evolves, it's a 'calm before the storm,' with future outlooks hinging on interest rate adjustments and evolving demand dynamics.
