Commercial Real Estate Market Report: Q3 2023

The "wait and see” approach continues to be the theme of 2023 with most economic news inspiring neither significant confidence nor dread. The Fed continues to wage its tightrope balancing battle against inflation, while trying to avoid undue deterioration in the capital markets environment. Individually, the core real estate sectors each has its own specific challenges, with multifamily seeing an extremely high amount of new supply coming online pressuring rents, retail dealing with decreased consumer spending and office markets still contending with the fundamental demand concerns precipitated by the pandemic.

Key takeaways:

• Multifamily housing: Operational challenges in the multifamily housing sector intensified in the third quarter. Despite the reported rent decline, rents are still exceptionally high relative to historical standards. Margins are also being pressured by expenses, with multifamily suffering from significant increases in insurance costs along with the broader markets.
• Office: The office sector exhibited a decline in transaction activity in the third quarter as struggling office fundamentals have resulted in lower levels of demand. The future of office usage, once uncertain, has stabilized at levels significantly below pre-pandemic rates, forcing both users and owners of office real estate to reevaluate their strategies for leasing and occupying space.
• Retail: Tighter consumer budgets due to the confluence of a number of factors including inflation and high interest rates have resulted in tepid sales growth. Excess household savings that were accumulated during the pandemic are largely expended, which may cause malls and experiential-focused assets to struggle while necessity assets and discount retailers continue to demonstrate reliability and stability.
• Industrial: The industrial real estate market has entered a “cooling off” period following years of rapid expansion, rent growth and compressing vacancy rates. While market rents, vacancy and absorption levels remain healthy, these key performance indicators are trending downward due to general economic headwinds and an ever-increasing level of industrial supply.
• Capital markets: Real estate investment trust (REIT) equities were down in September and remain mixed for the year with mortgage REITs showing the best performance as debt markets have been active relative to property transactions. Merger activity continued to show moderate activity with a number of relatively smaller deals announced, including some consolidation in the mortgage REIT space and a very large deal to take a hospitality company private.

For further analysis of the third quarter, download our latest report.

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