Q3 Fundamentals Stable Amid Overdevelopment, Economic Uncertainty
Commercial real estate fundamentals in the third quarter performed as expected, though uncertainty, a weakening employment market, and elevated development in certain property types tempered performance. Marcus & Millichap Chief Intelligence and Analytics Officer John Chang said the outlook could improve considerably if a recession is avoided and market uncertainty eases.
The biggest challenge for apartments has been a historic wave of new construction, particularly in Austin, Dallas, Charlotte, Denver, Nashville, and Phoenix.
“The overdevelopment headwinds should stabilize soon,” said Chang.
The Q3 apartment vacancy rates ticked up to 4.6%, but remain 100 basis points below the same time last year. Markets with limited multifamily additions—such as Chicago, Cincinnati, Cleveland, Detroit, Minneapolis, and San Francisco—outperformed, delivering rent growth of more than 5% over the past year.
The office sector recorded its sixth consecutive quarter of positive net absorption, with nearly 38 million square feet filled, reducing the national vacancy rate by 30 basis points to 16.4%. Markets seeing the largest improvements included San Jose (down 230 basis points to 17.7%), New York (down 210 basis points to 14.3%), Milwaukee (down 170 basis points to 16.4%), Orange County (down 160 basis points to 15.3%), and Kansas City (down 150 basis points to 12%). Cities with the lowest overall vacancy rates include Riverside, San Bernardino, Miami, Cleveland, Tampa, and Indianapolis.
Industrial space demand returned to positive territory in Q3, with nearly 20 million square feet absorbed. Yet ongoing elevated completions pushed the national industrial vacancy rate to 7.8%, the highest since 2013. Over the past decade, roughly 3.5 billion square feet of industrial space has been added, Chang noted. Construction has been concentrated in Riverside, San Bernardino, Houston, Atlanta, Phoenix, and Chicago—markets with major ports and distribution hubs—driving up vacancy rates. Conversely, Midwest metros like Minneapolis, Cleveland, St. Louis, Detroit, and Louisville experienced minimal construction and maintain exceptionally low vacancy rates.
Retail absorption was modestly positive following two quarters of decline, with the overall vacancy rate nudging up slightly to 4.9%, still below the long-term average. Vacancy rates are lowest in northern New Jersey, Boston, Indianapolis, Miami, and Minneapolis, all under 3.5%. “Unlike apartments and industrial, the rise really hasn't been driven by development,” said Chang. “It reflects a bit of a slowdown in the pace of leasing, as the impact of uncertainty, tariffs, and slowing job creation has caused many retailers to throttle back their expansion plans.”
Well-located retail, especially centers with necessity or experiential tenants, remains in demand. If no recession occurs and trade policy stabilizes, retail vacancy rates are expected to trend lower.
Source: GlobeSt/ALM