2023 US Real Estate Market Outlook examines the year ahead
The multifamily sector will continue to benefit as the single-family sector falters in 2023, while the health of the office market will be contingent on corporate layoffs, economists said.
Matthew Vance (pictured left), Americas head of multifamily research for CBRE, offered his predictions for the sector during the recent 2023 US Real Estate Market Outlook. While demand has waned somewhat, the sector is expected to be the shining star of commercial real estate this year, he suggested.
“It is true that demand has lagged,” he said. “New apartment leasing flatlined last year, and it allowed supply to come in and push up vacancy rates. “We expect that supply and demand imbalance will continue this year, and that demand really has its work cut out for it. Not only do we have the economic turbulence, but there’s also a record number of multifamily units under construction in the US.”
Across the US, pipeline well dispersed
“With the exception of a few markets where supply is heavily concentrated, the pipeline is fairly well dispersed geographically,” Vance said. “There is a housing shortage in the US, and because it’s most significant in the single-family market, multi-family is playing this really important role in the overall housing supply for this country. The vacancy rate just crossed over 4% in late 2022, and while we expect softer demand and health supply to continue pushing that vacancy toward its long run trend of about 5% this year, it’s that below-trend vacancy between now and then we expect will support health rent growth – not anything like what we’ve seen the last couple of years, but above the 2.5% to 3% average rent growth we experienced in the years just prior to the pandemic.”
Moderator Julie Whelan, head of occupier research for the Americas at CBRE, responded: “We have to remember, even with multifamily, that if growth moderates from where it has been, it’s still historically in a good place.”
The state of the office market
Jessica Morin (pictured right), research director at CBRE, addressed the state of the office market in 2023.
“The structural and cyclical changes right now are top of mind for both occupiers and landlords, and they’re going to impact demand in the outlook this year,” she said. “The structural change is evident now. The physical occupancy of office buildings has really changed little since Labor Day, and nothing really points to a major shift in that, at least in the near term. Potentially, if we were going to see significant white-collar layoffs, it could give employers more leverage to mandate more days in the office. We’ve seen several large layoffs announced in the tech sector, and that’s really a sector that’s been the largest adopter of hybrid work. Because of that, the sector has really already scaled back on space over the last few years. The tech sector already has been the primary driver behind office leasing, so it is extremely influential to the health of the office market, and it’s definitely going to be a sector we continue to watch as it shapes our outlook.”
Cyclical changes loom large
“As we enter this recession, companies are going to look to cut costs and they’re going to look to prevent unnecessary spending,” Morin said. “So real estate leaders are going to use office utilization data to eliminate unused office space. Both these forces are impacting space decisions, and recently downsizing and relocation have been among the top 10 inquiries. The leasing data reflects this already, the average lease size last year was 18% smaller than what we saw in 2018 and 2019. But what’s interesting is even though it’s smaller, we actually saw more transactions last year than in 2018 and 2019. So what that tells me is the uncertainty around the structural change starting to weaken this wait-and-see strategy isn’t really going to be the strategy in 2023.”
Market over-correction could occur
“Occupiers are becoming more confident around those changes,” Morin said. “What could happen is we could see an over-correction of the market and occupiers may actually realize that they cut too much space, but that remains to be seen. What we expect, at least in 2023, is vacancy to near its peak somewhere around 19%, and asking rents are expected to modestly fall.”