U.S. commercial real estate - statistics & facts
The U.S. commercial real estate market is the arena of giants, where private equity, public companies, and institutional investors such as pension funds make multi-billion-dollar deals and define the landscape of cities. Commercial real estate is a profitable business. However, in 2023, investment properties saw the first year with negative returns since 2009. Investment activity has also plummeted, raising concerns about the health of the sector.
Despite an economic slowdown, the U.S. commercial property market continues to offer diverse investment opportunities. These opportunities will widely depend on the property type, location, quality, and naturally, the overall economic outlook and the development of interest rates.
Why has the U.S. commercial property sector slowed?
Cheap credit after the financial crisis brought rising rents and growing property values. Conversely, soaring interest rates and a sluggish economy after the COVID-19 pandemic made investors and occupiers more cautious. Uncertainty about the future of interest rates, economic growth, and demand also implies uncertainty in investment costs, anticipated rental growth, and price appreciation. The effects of this are visible in the development of cap rates – a measure of the expected return on investment showing the net operating income of a property as a ratio of the current asset value. The average cap rate for all property types has soared since 2021 - a consequence of the decline in property prices. The depreciation was most severe for offices, where asset values fell by more than 21 percent year-on-year as of the first quarter of 2024.What are the drivers behind the recovery of the sector?
Properties need occupiers. Since 2021, vacancy rates have overall increased, showing signs of oversupply in the market. Offices have been most affected, as demand has decreased because of hybrid work and the flight to quality – occupiers’ growing preference for newly built, modern buildings. As business and consumer sentiment increase, transactions in the occupier market should recover, contributing to improving market fundamentals. Another challenge the sector must overcome is refinancing under a tighter lending environment. Commercial property is responsible for a growing volume of debt, with rising delinquency rates causing concerns. The much-anticipated decline in interest rates will help borrowers refinance and avoid widespread defaults.Despite an economic slowdown, the U.S. commercial property market continues to offer diverse investment opportunities. These opportunities will widely depend on the property type, location, quality, and naturally, the overall economic outlook and the development of interest rates.
