Q4 2021 Commercial Real Estate Market Overview
Total U.S. commercial real estate investment volume was $296 billion in Q4 2021, bringing the entire year to $746 billion, both of which are record levels. Multifamily led all sectors in investment volume with $136 billion in Q4 and $315 billion for the year. Although Los Angeles. and New York had the highest levels of investment in 2021, Sun Belt markets had the strongest year-over-year growth rates, including Las Vegas, Houston, and South Florida.
Market conditions in commercial real estate improved across the board in the fourth quarter due to various reasons. Solid demand from tenants drove continuous decline in vacancy rates across most property types as well as rent growth. Among all major asset types, office and retail, the two asset types that declined the most as a result of the pandemic, both showed signs of stabilization and continuing rebound. At the same time, industrial and multifamily, two asset types that have experienced soaring demand during the pandemic, have experienced record rent growth with very low vacancy. Demand for industrial properties has been on the rise due to an increase in online shopping and e-commerce as a result of the pandemic, which lead to stronger demand for industrial properties related to production, transportation, distribution, and logistics. This increase in demand for industrial properties outweighed the contraction in the demand for retail sector.
U.S. Real Estate – Multifamily Market
Multifamily demand eased slightly in the fourth quarter of 2021, to 71,600 units, from 185,300 in the prior quarter. Some of this slowdown is a result of seasonal patterns, as the fourth quarter typically is the slowest period each year for apartment leasing. Furthermore, apartment vacancies are low and units are generally hard to find, therefore, rising rents are starting to result in affordability challenges for some households. Net absorption over the past four quarters, which averages out these seasonal differences, came down slightly from the prior quarter but continued to exceed new supply by a ratio of nearly 2:1. Annual net absorption for 2021 was up 238% compared to 2020 absorption and up 97% compared to 2019 absorption.
The rise in multifamily demand during year 2021 was driven by a number of tailwinds. Firstly, household formation as result of pent-up demand was released from COVID lockdowns. Secondly, job and wage growth due to strong economic recovery and continued growth had a positive impact. Furthermore, home prices rose sharply nationwide, causing affordability issues for border-line buyers and driving them towards renting. New York City led all major metros in absorption, emerging out of its overwhelming COVID impact and strict lockdown restrictions. The supply of new unit is also constrained by supply chain issues and a tight labor market as construction costs skyrocketed, so major markets have not been adding supply quickly enough to meet the persistent demand. Overall U.S. vacancy rate for multifamily fell even further by 40 bps from Q3 to a record low of 2.5% in Q4. Noticeably, Class A multifamily experienced the largest decline in vacancy rate to 3.1% by the end of the year, largely due to residents who had previously moved outside of urban centers and are finally moving back. However, Class B and Class C vacancy rates also fell to 2.5% and 2.1%, respectively. Average rent across the nation rose by 2.5% over last quarter to a record $1,950 per month.
U.S. Multifamily Vacancy Rate and YoY % Change
U.S. Multifamily Vacancy Rate by Class
U.S. Multifamily Monthly Rent and YoY % Change
U.S. Multifamily Completion vs. Absorption
U.S. Real Estate – Commercial Retail Market
In Q4, commercial retail properties saw the second consecutive quarter of robust demand, with net absorption of 28 million square feet. In the second half of 2021, commercial retail sector experienced the highest six-month growth in demand since 2016. There has been very minimal new construction of retail properties, keeping supply low. Consumer sentiment continued to fall in Q4 amidst rising inflation and uncertainty about lingering pandemic effects. On the other hand, wage growth remained high as job openings continued to outpace job seekers. The 2021 holiday shopping season turned out strong, with total retail sales increasing by 16.9% over the prior year’s holiday season. Retailers that experienced the largest growth in sales included clothing stores (48% increase largely due to employees starting to return to the stores and increased social gatherings), restaurants (36% increase largely due to higher vaccinations and loosened dine-in restrictions), and gas stations (37% increase largely due to inflation but also a result of more work commute and vacations). Vacancy rate for commercial retail properties fell in Q4 to 5.6%, down 1% from the previous year, partly due to retailers and restaurants finally re-opening after two years of inactivity and partly due to the lack of new supply being built. Rents continued to climb mainly due to a lack of new supply, however, given the backdrop of high inflation, the rent increase seemed fairly minimal.
U.S. Consumer Retail Sales Growth and YoY% Change
U.S. Retail Vacancy Rate by Property Type
U.S. Retail Average Asking Rent
Data Sources: CBRE Research, CBRE Econometric Advisors, CoStar Realty Information Inc., Bloomberg, Zillow Group, Redfin
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