August 2024 Commercial Real Estate Market Insights

" data-src="https://cdn.nar.realtor/sites/default/files/styles/wysiwyg_small2/public/2024-08-commercial-real-estate-market-insights-report-cover-08-29-2024-300w-433h.png?itok=KWg2tmuY" class="b-lazy" width="200" height="289" alt="Cover of the August 2024 Commercial Real Estate Market Insights report" title="Cover of the August 2024 Commercial Real Estate Market Insights report"> Download PDF With inflation and the labor market continuing to ease in July, the Federal Reserve's rate cuts aren't far off. Among all sectors in commercial real estate, the office sector, in particular, is eagerly awaiting these cuts. Office vacancy rates remained at a record high of 13.8% in July, underscoring the sector's ongoing challenges. Meanwhile, both retail and industrial fundaments softened further in July, with net absorption falling by 40% and 68% compared to a year ago in these two sectors, respectively. On the other hand, demand for apartments continued to surge as elevated mortgage rates hurt housing affordability. Below is a summary of how the major commercial real estate sectors have performed as we entered the second half of the year: Office Properties Office vacancy rate remained at record highs, with vacated office spaces still outpacing those being occupied. The outlook suggests that the vacancy rate will likely rise further with negative net absorption, which is expected to persist at least through the remainder of the year and the year after. Leasing activity, an indicator of demand and interest from potential tenants, has declined even more, now sitting 63 percentage points below the pre-pandemic average. But, on a positive note, the pace of additional vacancies has slowed down. The surplus of unoccupied office space has reduced from nearly 58 million square feet a year ago to 44 million square feet in July 2024. " data-src="https://cdn.nar.realtor/sites/default/files/styles/inline_paragraph_image/public/office-properties-net-absorption-in-square-feet-q1-2021-to-q3-2024-bar-graph-08-29-2024-842w-826h.png?itok=vYq1mcPZ" class="b-lazy" width="842" height="826" alt="Bar graph: Office properties net absorption in square feet, Q1 2021 to Q3 2024" title="Bar graph: Office properties net absorption in square feet, Q1 2021 to Q3 2024"> Multifamily Properties By contrast, the multifamily sector benefited from elevated mortgage rates in July. Net absorption was 90% higher than a year ago, sitting at 470,000 units. Another sign of strong demand in the sector is that landlords are offering fewer discounts on their initial asking rents compared to the pre-pandemic average. However, despite this robust demand for rental units, elevated completions and units under construction have kept the multifamily vacancy rate near 8% and rent growth at around year-over-year. " data-src="https://cdn.nar.realtor/sites/default/files/styles/inline_paragraph_image/public/multifamily-properties-top-10-areas-with-strongest-12-month-absorption-2024-q3-and-2023-q3-table-08-29-2024-862w-1036h.png?itok=8DbAWWuG" class="b-lazy" width="862" height="1036" alt="Table: Multifamily Properties: Top 10 Areas with Strongest 12-month Absorption, 2024 Q3 and 2023 Q3" title="Table: Multifamily Properties: Top 10 Areas with Strongest 12-month Absorption, 2024 Q3 and 2023 Q3"> Retail Properties Availability conditions in the retail sector remained tight in July. Since the end of last year, only 4.7% of retail space is available for lease, the lowest level on record. This limited availability of retail spaces is the primary reason why the retail vacancy rate has stayed near 4% since the end of 2022, despite the slowdown in demand for retail spaces. Specifically, retail net absorption is down by 40 percentage points compared to a year earlier. With fewer retail spaces under construction, the fundamentals of this sector are expected to remain tight for the rest of the year. " data-src="https://cdn.nar.realtor/sites/default/files/styles/inline_paragraph_image/public/retail-properties-12-month-net-absorption-by-type-2014-to-2024-line-graph-08-29-2024-1300w-580h.png?itok=uCNp7jFu" class="b-lazy" width="1200" height="535" alt="Line graph: Retail properties net absorption by type, 2014 to 2024" title="Line graph: Retail properties net absorption by type, 2014 to 2024"> Industrial Properties The industrial sector continued to lose momentum in July. Net absorption was nearly 70 percentage points lower than a year ago, while rent growth decelerated significantly, dropping to 3.6% from 8.1%. The vacancy rate also rose to over 6.5% from 5.1%. With inventory levels at record highs, the outlook suggests further softening in this sector for the remainder of the year. However, easing inflation in the coming months may boost demand for goods. This usually creates a ripple effect, increasing the need for industrial spaces to manage production, storage, and distribution. " data-src="https://cdn.nar.realtor/sites/default/files/styles/inline_paragraph_image/public/industrial-properties-top-10-areas-with-the-strongest-12-month-absorption-q3-2024-and-q3-2023-table-08-29-2024-840w-1018h.png?itok=MT2qfj69" class="b-lazy" width="840" height="1018" alt="Table: Industrial properties top 10 areas with the strongest 12-month absorbtion, Q3 2024 and Q3 2023" title="Table: Industrial properties top 10 areas with the strongest 12-month absorbtion, Q3 2024 and Q3 2023"> Hotel Properties As we start Q3 2024, the hospitality sector is maintaining stability. Hotel occupancy rates have leveled off at around 63%, remaining roughly 3% below pre- pandemic figures, which suggests that a complete recovery may be elusive due to the prevalence of remote work. Nevertheless, average daily rates and revenue per available room have now exceeded pre-pandemic benchmarks. " data-src="https://cdn.nar.realtor/sites/default/files/styles/inline_paragraph_image/public/hotel-properties-12-month-occupancy-rate-in-july-2019-to-2024-bar-graph-08-29-2024-820w-470h.png?itok=vpo588dQ" class="b-lazy" width="820" height="470" alt="Bar graph: Hotel properties 12-month occupancy rate in July 2019 to 2024" title="Bar graph: Hotel properties 12-month occupancy rate in July 2019 to 2024"> Download the full report

Instant Reaction: Mortgage Rates, August 29, 2024

Facts: The average 30-year fixed mortgage rate from Freddie Mac dropped to 6.35% this week from 6.46% last week. At 6.35%, with 20% down, a monthly mortgage payment on a home with a price of $400,000 is $1,991. With 10% down, the typical payment would be $2,240. Positive: This is the lowest that mortgage interest rates have dropped in the past 15 months. This changes housing affordability for home buyers. For buyers who sought a mortgage at the recent high of 7.79% in October 2023, the payment would be $2,301. At 6.35%, this is a payment difference of $310 monthly or $3,720 a year.  Negative: The question is: When are mortgage rates low enough for current homeowners to make a move? While the current rate helps first-time buyers, it might be a big shrug for repeat buyers, as they are locked into ultra-low-rate mortgages that we will not see again.

Pending Home Sales Dropped 5.5% in July

Key Highlights Pending home sales fell 5.5% in July. Month over month, contract signings declined in all four U.S. regions. Compared to one year ago, pending home sales increased in the Northeast but decreased in the Midwest, South and West.   WASHINGTON (August 29, 2024) – Pending home sales in July retreated 5.5%, according to the National Association of REALTORS®. All four U.S. regions posted monthly losses in transactions. Year-over-year, the Northeast rose while the Midwest, South and West registered declines. The Pending Home Sales Index (PHSI)* – a forward-looking indicator of home sales based on contract signings – slipped to 70.2 in July, the lowest reading since the index began tracking in 2001. Year over year, pending transactions were down 8.5%. An index of 100 is equal to the level of contract activity in 2001. "A sales recovery did not occur in midsummer," said NAR Chief Economist Lawrence Yun. "The positive impact of job growth and higher inventory could not overcome affordability challenges and some degree of wait-and-see related to the upcoming U.S. presidential election." Pending Home Sales Regional Breakdown The Northeast PHSI waned 1.4% from last month to 64.6, an increase of 2.4% from July 2023. The Midwest index reduced 7.8% to 67.8 in July, down 11.4% from one year ago. The South PHSI sank 6.5% to 83.5 in July, falling 11.5% from the prior year. The West index shrunk 3.8% in July to 56.2, down 6.0% from July 2023. "In terms of home sales and prices, the New England region has performed relatively better than other regions in recent months," added Yun. "Current lower, falling mortgage rates will no doubt bring buyers into market." About the National Association of REALTORS® The National Association of REALTORS® is America's largest trade association, representing 1.5 million members involved in all aspects of the residential and commercial real estate industries. The term REALTOR® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics. # # # *The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing. Pending contracts are good early indicators of upcoming sales closings. However, the amount of time between pending contracts and completed sales is not identical for all home sales. Variations in the length of the process from pending contract to closed sale can be caused by issues such as buyer difficulties with obtaining mortgage financing, home inspection problems, or appraisal issues. The index is based on a sample that covers about 40% of multiple listing service data each month. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity parallels the level of closed existing-home sales in the following two months. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined. By coincidence, the volume of existing-home sales in 2001 fell within the range of 5.0 to 5.5 million, which is considered normal for the current U.S. population. NOTE: Existing-Home Sales for August will be released September 19. The next Pending Home Sales Index will be released September 26. All release times are 10 a.m. Eastern. View the NAR Statistical News Release Schedule.