July 2023 Commercial Real Estate Market Insights

Leasing velocity slowed down in commercial real estate during the year's second quarter. While there is still much uncertainty about the total impact of the bank failures earlier in the year, there are rising concerns and speculation about where commercial real estate is headed. Since commercial real estate relies heavily on small banks for capital, a pullback in lending among these banks could further impact commercial real estate. However, data shows that commercial real estate lending activity is increasing weekly. Meanwhile, delinquency rates for commercial loans have increased since the end of 2022, but they remain below 1%. Nevertheless, delinquencies are expected to rise further in the year's second half.

As a result, most commercial real estate sectors continue to experience slower rent growth and higher vacancy rates compared to the previous year. In the office sector, there are more available spaces for lease than ever. Despite multiple efforts to repurpose unused office spaces, the slow return-to-office movement continues to hurt this sector. In the multifamily sector, rent growth has slowed even further compared to the beginning of the year, but the vacancy rate remained virtually the same in the second quarter compared to the previous quarter. Although leasing activity continues to slow down in the retail sector, the vacancy rate remains near 4%, the lowest rate in any other sector in commercial real estate. Finally, the performance of the industrial sector has eased from the 2022 record highs, but rent prices for industrial spaces grew more than 8%, significantly faster than pre-pandemic.