U.S. Quarterly Market Update: Q1 2023

Preview

• In Q1 2023, U.S. economic growth remained positive, yet moderated relative to the past two quarters. U.S. annualized real gross domestic product (GDP) rose by 1.1%.¹ Growth reflected increases in consumer spending, exports, government spending, and business investment that were partly offset by declines in inventory and residential investment, as well as more imports.
• Nonfarm payrolls added 1 million new jobs during the first quarter, as the unemployment rate fully rebounded to the two-decade low of 3.5%.² There are still significantly more job openings than total unemployed people despite accelerating corporate layoffs over the past several months.
• Overall, institutional-quality commercial real estate (CRE) property fundamentals have remained healthy for most sectors; however, an industrywide re-pricing is underway. Investor caution has risen with the rapid rise in financing costs and a greater risk of recession.
• In Q1, liquidity across CRE capital markets was more restrained, with transaction volume falling by 55.9% year-over-year to $85.0 billion. Multifamily and industrial led in activity, while investor interest in office decreased notably. Alternative sectors remained a sizeable share of total CRE sales.
• Private real estate investment performance continued to decline. In Q1, the NCREIF Property Index (NPI) posted its second straight negative return, at -1.8%. This was an improvement, however, from its -3.5% return in Q4 2022, and brings the trailing one-year annual total return to -1.6%. NPI cap rates expanded by 16 bps in Q1 2023 after rising 21 bps in Q4 2022.
• In Q1, industrial fundamentals remained historically strong. However, Q1 vacancy rose by 30 bps to 3.4% from the all-time low, as net absorption moderated and was outpaced by completions. Nevertheless, annual average asking rent growth reached 12.5%, the second highest quarterly pace on record.
• The outlook for U.S. multifamily property remains robust, although the ongoing wave of new supply has impacted absorption. In Q1, the U.S. vacancy rate increased for the fourth straight quarter, rising by 30 bps to 4.9%, above its pre-COVID level.³ Still, nearly all markets reported positive rent growth. Low affordability of for-sale housing, the housing shortage, and steady job growth should drive future demand.
• Recovering conditions in the office sector slowed, with many markets reporting lower leasing levels relative to recent quarters. The vacancy rate increased by 50 bps to 17.8%, rising in both CBDs and the suburbs. With the resilience of remote work, physical office occupancy has remained around 50% relative to pre-COVID levels.⁴
• Demand conditions at neighborhood and community shopping centers remained the strongest in recent years. Net absorption well outpaced completions, and the availability rate declined by 10 bps to 6.8%, the lowest level on record. Shops were the only sector to report positive sales growth year-over-year.⁵
• Demand for life sciences space remained solid. Q1 average asking rents rose by 3.2% amidst a wave of Class A deliveries. Tenant requirements dipped slightly to an estimated 14.6 million sf,⁶ following declines in venture capital funding. Total new investment and industry job growth were still relatively high in the corporate biopharma and biotech industries.
• In Q1, self-storage demand remained healthy, although new leasing activity moderated with a spike in new supply. Street rates have normalized after strengthening dramatically post-pandemic. Still, rents remained near record levels, with the Sun Belt outperforming recently in rent growth.