Four Sectors in the Fourth Quarter – Oct. 7, 2024
2024’s fourth quarter has just gotten underway and, notwithstanding the uncertainty of an election year that may prove to be highly consequential, the near-term outlook for commercial real estate is one of stability. That’s one of the topline conclusions to be drawn from the Q3 2024 Preliminary Trend Announcement just published by Moody’s.
Well, make that stability across most sectors. Office vacancies nationwide held steady at 20.1% during the third quarter, pausing a slow-but-steady climb from 16.8% in Q4 2019. However, the Moody’s report predicted that the vacancy rate will continue to rise.
It’s worth noting that the current high vacancy rate in office bucks historical trends. Typically, weak demand for space coincides with a weak labor market, and the U.S. jobs outlook is relatively strong. “Questions over how high the vacancy rate will eventually reach largely depend on continued labor market health,” wrote a Moody’s team led by Thomas LaSalvia.
Vacancies also remained flat for multifamily, but in the mid-single-digit range, rather than double digits as in the office sector. Meanwhile, vacancies declined during Q3 in both industrial and retail.
The two sectors have had different stories to tell over the past few years. Industrial is normalizing after “impressive inventory expansion and surging demand in recent times,” according to Moody’s, while brick-and-mortar retail—largely written off at the height of the pandemic—is seeing a performance gap between older malls and newer mixed-use properties.
National sector trends in Q3 2024 remained “largely consistent with previous quarters, but notable changes occurred at the metropolitan level,” the report stated. “National discussions on key issues such as housing affordability challenges, downtown revitalization and design, and capturing momentum in a revitalized industrial sector are playing out in unique ways at the local level.”
More broadly, LaSalvia and his team wrote, “While the office sector faces a challenging transition under the hybrid work model, stable market conditions across the multifamily, retail, and industrial sectors will continue to capture opportunities arising from improved affordability and ongoing lifestyle changes.”
Helping matters considerably is the 50-basis-point rate cut enacted by the Federal Reserve in September. “The period of ‘higher for longer’ has affected sectors across CRE by altering capital availability and raising concerns that the possibility of over-tightening may lead to a weakened labor market, but the likelihood of an economic soft landing has continued to rise throughout 2024,” wrote the Moody’s team.
That 50-point cut was “more aggressive than anticipated under the soft-landing scenario, but essential for consumer financing, commercial lending, and future real estate investments,” according to Moody’s.
While the Mortgage Bankers Association recently reported only modest growth in CRE mortgage volume during the second quarter because of reduced new volume and fewer payoffs, the Moody’s team noted, “Lower long-term interest rates should stimulate both origination and refinancing activities, drive transactions and price discoveries, and encourage future project investments.
“Moreover, lower inflation rates, full employment, and steady wage growth should continue to foster healthy household formation and strengthen renters’ financial buffers, thereby supporting sustainable consumer spending and housing demand.”