The commercial real estate industry is poised to reach the equilibrium it has been striving for during the past year, according to a Moody’s sector-by-sector analysis.
Moody’s characterized the multifamily sector’s second-half performance as balanced, with an expected 300,000 units completed across 79 major metros for the year. The average vacancy rate increased 10 basis points during the last two quarters, finishing 2024 at 6.1%, a 40 bps increase from last year. This is the highest level on record since 2011.
The relatively controlled vacancy growth can be attributed to steady rental demand driven by population growth tied to a rapid recovery in immigration, said Moody’s. With single-family housing inventory remaining low, many renters continue to opt to stay in the rental market, which has balanced out the supply shock.
Strong rental demand combined with competitive new Class A multifamily inventory has pushed rent growth higher during the past three quarters. National asking rent came in at $1,850 during the fourth quarter, an increase of 0.2% that put it nearly at its all-time high of $1,851 in Q3 2023. Elevated vacancy led to longer lease-up times, which encouraged concessions, the firm said.
Meanwhile, the national office vacancy rate hit a new record high during the fourth quarter at 20.4% after rising 80 bps over the year. Effective rents increased by only 0.1%. A permanent reduction in office demand due to the pandemic has led to more flexible and shorter office leases that are now fusing with early-pandemic lease rollovers. This is driving more volatility in future office performance, Moody’s said.
“While Q4 2024 represents another down-performing year for the sector, the emerging trend of popular in-person working days and stabilizing return-to-office rate suggest firms may only be able to reduce their footprint to a certain extent before moving toward a new equilibrium,” the report said.
“The success of newer buildings designed to maximize in-person collaboration with a reduced need for permanent offices and cubicles redefined the flight-to-quality story despite the overall struggle, though 17.5 million square feet of new construction in 2024 remains below pre-pandemic levels.”Retail vacancy remained stable at 10.3% during the fourth quarter, and both asking and effective rent slightly increased by 0.3% to stand at $21.90 and $19.19 per square foot, respectively. This steady performance built upon better-than-expected retail sales during the quarter, primarily driven by motor vehicles and online merchandise purchases. Moody’s noted consumer confidence has been bolstered by the resilience of the labor market, robust household finances, Federal Reserve interest rate cuts, and a slowdown in inflation.
The industrial sector is continuing on a stabilization trend, with vacancy rates decreasing by 10 bps to 6.9%, which is below pre-pandemic levels. New industrial construction starts have slowed, but a resurgence in construction activities on previously delayed projects could result in higher vacancy rates. Both asking and effective rent grew by 0.3% during the fourth quarter, marking a quarter-over-quarter decline.