U.S. commercial property prices resumed their decline in Q3 as interest rates once thought to be inconceivable have become the norm, and will likely continue for at least the next 24 months.

Retail rent has increased 11% since the end of 2019 and 4% over the past year as retailers enjoy surging sales amid limited store space.  The recent pace of rent growth is more than twice that seen during the prior decade.  Available retail space in prime corridors is limited and construction and financing costs challenging for new development.  Retail landlords will maintain strong pricing power as long as consumers spend at current levels.  This will be especially true in markets that capture an outsized share of future population growth.

The industrial vacancy rate has been rising since mid-2022, as slowing tenant demand coincides with record levels of new project completions.  At 5.3%, the vacancy rate is now even with 2016 levels, and tenants have some bargaining power.  Industrial rents increased by 7.2% over the past 12 months, but most of these gains were achieved in late 2022 and early 2023.  This quarter, rents grew by only 1.1%, or an annualized growth rate of 4.6%, below what was common in the five years prior to the pandemic.

Multifamily values peaked in early 2022.  The earlier surge in valuations was fueled by Covid-related rent growth.  Rents surged 10% in Q4 2021 (20% in some markets).  Rent growth has slowed since the summer of 2022.  Currently, multifamily cap rates are close to 2019 levels.  Forecasters predict rent growth may recover to pre-pandemic rates by Q3 2024, suggesting valuations may stabilize over the next 6-12 months.  Long term, the sector will be propelled housing scarcity, expensive for-sale housing and favorable demographics.

The office vacancy rate is now at 13.3%, the highest level in a decade.  The average sales price has fallen 6% year over year.  According to security access data, office attendance has plateaued at 50% of pre-pandemic levels — an ominous sign for future demand.  If attendance does not pick up, owners will have trouble refinancing the $380 billion in loans maturing over the next four years.

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