Real estate has hit the skids since the Federal Reserve began raising interest rates in March 2022 and the economy showed some signs of slowing.
Rising interest rates hurt real estate because many owners borrow money to pay for their properties. So that borrowing becomes more expensive. Also, higher rates hurt real estate by making bonds more attractive as an investment, given their climbing yields.
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The FTSE Nareit REIT index returned a negative 20% over the last 12 months, though it has stabilized this year, returning 1% so far.
CoStar’s April 2023 real estate data update gives a good picture of some of the problems facing the real estate industry.
The office sector doesn’t look good. Both the national vacancy rate (12.9%) and the availability rate (16.4%) stood at record highs in the first quarter, the report says.
Vacancy Rate May Rise Further
The vacancy rate has increased 3.33 percentage points since the end of 2019 and now exceeds its 2007-09 peak. Availability has climbed 4.1 percentage points since the end of 2019.
“The spread between the two metrics has rarely been as wide and suggests room for vacancy to increase further,” the report said. That’s because “availability includes space that is currently occupied but no longer needed.”
Another negative signal: while new leasing volume rose 5% in the second quarter from the first, it remained 16% below its pre-pandemic average.
Preliminary data indicate that the average size of new leases is shrinking again, as it did in the first 18 months of the pandemic.
“This could indicate smaller overall space needs, as tenants continue adapting to both new ways of working and economic headwinds that have slowed hiring and could lead to layoffs,” the report said.
Hospitality, Industrial Sectors Face Problems
In the hospitality sector, “rising interest rates and a projected recession in the latter half of 2022 appear to have spooked investors,” the report said. Transactions totaled $7 billion in the first quarter, 55% below the fourth-quarter level.
Further, “as the year progresses, … the expected slowdown in corporate and consumer spending could affect hotel revenues and operating profits,” the report said.
In the industrial sector, absorption -- the change in occupied space -- remained positive in the first quarter at 56 million square feet, the report said. But that was only half the total of the first quarter last year.
And the vacancy rate ascended to 4.3% at the end of the first quarter from 4.0% at the end of last year.
While the industrial vacancy rate remains lower than any time in the 2010s, the first quarter of 2023 saw the largest increase in vacancy since 2009, the report said.
That resulted from “the record wave of new industrial developments that will continue bringing a large number of projects to completion through the remainder of 2023.”
In light of the report and other news, things don’t look so hot for the real estate sector. It’s hard to imagine the situation will get much better until interest rates fall and the economy completes whatever slowdown it’s likely to suffer.
