Commercial Real Estate Market Report: Q3 2022

The phrase “the new normal” has been overused in the wake of the COVID-19 pandemic, however, it is hard to ignore that some systemic changes have occurred in multiple core real estate sectors. 2022 has been characterized by the waning of the pandemic and the waxing of more familiar threats in the face of inflation and a potential recession.

As we anticipated, if inflation persisted, commercial real estate transaction activity delivered on the promise of decreased activity that we observed last quarter with transactions decreasing significantly across asset classes. Challenging debt and equity markets contributed to some contemplated deals not being able to be consummated while also contributing to a bid-ask spread between buyers and sellers.

Key takeaways: 

• After regaining some of their second-quarter losses, equity markets again turned negative in the second half of the third quarter under pressure from unrelenting inflation and continuing geopolitical uncertainty.
• Industrial has seen unprecedented demand growth outstripping supply and driving increased rents and valuations, changing how investors and end users of industrial property evaluate the sector.
• Office demand on the other hand is likely to remain below pre-COVID levels permanently. Offices nationwide continue to struggle with demand and occupancy as remote-working arrangements persist.
• New multifamily development has slowed, primarily due to financing issues, construction delays, and supply chain issues. Meanwhile, demand for apartment units is only increasing.
• Retail sales remained strong in the third quarter, averaging 9.44% over the same period in 2021.  Some increase in sales is inevitably attributable to inflation, however, mall traffic was noted as positive in the quarter with a Placer.ai report noting that indoor malls, open-air lifestyle centers and outlet malls saw month-over-month foot traffic increases of 23.4% in July.
• REITs continued to trade down within the broader equity market in the third quarter, with all REIT sectors posting declines for the second consecutive quarter.