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The first quarter of the year was anything but boring for commercial real estate. The recent developments in the banking sector added concerns about lending activity in the market. While commercial real estate relies heavily on the banking industry for capital, there were rising concerns that the recent bank failures would make it harder to get a commercial real estate loan. Nevertheless, according to the Federal Reserve, commercial real estate loans of small, domestically commercial banks remained unchanged during February and March despite the bank failures. Meanwhile, in April, lending activity is picking up week by week.
In addition, most commercial real estate sectors continue to experience slower rent price gains and higher vacancy rates compared to the previous year. While the Office sector is still struggling to recover from the pandemic, vacancy rates have reached new record highs. With multifamily construction overperforming in the last couple of years, apartment rent growth slowed down further from the record highs during the pandemic. But, although leasing activity is slower, the Retail sector was able to keep vacancy rates near 4%. And rent prices for industrial spaces grew more than 10%, significantly faster than pre-pandemic.
Here is how each commercial real estate sector performed in the first quarter of 2023.y
Multifamily Properties
The Multifamily sector continues to slow down from its record highs in 2021. Net absorption is 82% lower than the previous year, and the vacancy rate has increased to 6.7% from 5.0% the previous year. As a result, rent growth has decreased by over 8 percentage points in one year, reaching its lowest level since the start of 2021. Nevertheless, apartment rent growth returned to what it was considered normal before the pandemic. In the meantime, the multifamily sector will still perform better than pre-pandemic levels, owing to favorable demographics and a strong job market that promotes household formation.
Office Properties
Despite some employers mandating in-person work and the decline of remote jobs, the Office sector is still facing challenges. The downward trend of office space demand has continued throughout the year, resulting in a record-high vacancy rate of 12.9% compared to the previou year's 12.0%. The future of the traditional office space is unclear due to the ongoing impact of COVID-19, with many businesses adopting hybrid work arrangements that allow for a mix of in- person and remote work. However, many universities have recently shown interest in leasing office spaces in their effort to attract more students back to the classes.
Industrial Properties
The Industrial sector of commercial real estate has continued to show strength this year. As e-commerce sales and supply chain disruptions continue to drive demand for warehouse and distribution space, the industrial vacancy rate remains low at 4.3%. Furthermore, the industrial rent growth rate is remaining high at 10.3%, with warehouses having remarkable 11.7% rent growth.
Retail Properties
The Retail sector of commercial real estate had the lowest vacancy rate among all the sectors in March 2023. Despite higher prices, consumer spending remains strong. As a result, this sector continues to perform better than pre-pandemic. With inflation easing further and interest rates to stabilize later this year, the demand for retail space is expected to remain robust.
Hotel Properties
The hospitality sector saw a further increase in hotel revenue, which was previously affected by COVID-19 restrictions and quarantine measures. The revenue per available room (RevPAR) is now over 10% higher than it was before the pandemic. As both business and leisure travel picks up, the demand for hospitality spaces is expected to keep increasing throughout 2023.
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