The challenges facing the office market are broad, and especially pronounced at high-profile buildings in the largest urban markets. National office vacancy hit a record 13% in Q3 2023. Downtown office attendance is at half of its pre-pandemic level, based on keycard data. On a bright note, suburban office properties showed exceptionally robust net cash flow growth at 89.5%, according to CMBS loan data for 2021 and 2022.
Multifamily properties are still set to outperform other major property types, even with cooling rent growth, higher vacancy, new supply, and larger concession packages. Average rent delinquency is below 4%. The property type faces ongoing downside risk from new construction. There’s currently 1 million units under construction with an expected 520,000 units set for completion this year — the highest total since the mid-1980s. Nationally, average apartment rents are still rising by 1.2% annually.
Retail demand keeps rising, albeit at a slower pace. More retail space was occupied than vacated for the 10th consecutive quarter. Overall, demand for retail space rose more than 10.5 million SF in the 3rd quarter and has climbed 20.8 million SF since Jan. 1. Even so, the amount of retail demand in the first half of 2023 was the lowest seen since 2020 and the third-lowest total recorded over the past decade. Retailers continued to favor freestanding properties and smaller multi-tenant shopping centers. Demand for enclosed malls has declined by over 30 million SF since January 2020.
On the sale side: higher interest rates weigh on asset values at the upper end while pricing remains steadier for assets under $3 million. Before the interest rate hikes, transactions under $3 million constituted about half of all sales activity. Last quarter, transactions under $3 million accounted for 64% of market activity. Enough smaller investors prefer all-cash transactions for their transactions to be less influenced by interest rate movements.
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