There’s clear evidence growth in commercial real estate activity in the United States is starting to slow.

A recent report from the National Association of Realtors written by Nadia Evangelou, senior economist and director of forecasting, detailed the situation:

“After the strong rebound for the U.S. economy in 2021, growth in 2022 has slowed in the face of rising inflation, the household income squeeze and geopolitical events.  While the economy continues to deal with elevated inflation, data shows a slowdown in the growth of commercial real estate. Demand for apartments and office spaces is lower compared to previous quarters.

“While the industrial boom continues to show no signs of stopping, multifamily absorption and rent growth are decelerating. Multifamily absorption in the last four quarters was below the pre-pandemic levels, in the range of 60,000 to 70,000 units. In the meantime, rents rose year over year at a slower pace, by less than a double-digit percentage for the last two quarters. However, multifamily housing demand remains relatively strong. Given rising mortgage rates and home prices, people may be forced to rent for longer due to decreasing affordability.

“As the country navigates hybrid work, the office sector continues to struggle. In Q3 2022, about 1.34 million more square feet of office space was vacant and placed on the market than were leased. Although more people returned to their offices, after four quarters with positive net absorption, demand for office space dropped as net absorption turned negative again. As a result, the market’s net demand for office spaces decreased relative to supply, and the vacancy rate rose to 12.4 percent in Q3 2022 from 12.3 percent in the previous quarter. Meanwhile, the office sector has the highest vacancy rate across all sectors of the commercial real estate market.

“Retail sales — excluding gas, auto and non-store retailers — advanced to $383 billion in August, a 19 percent increase from pre-pandemic levels (August 2019). As a result, net absorption increased to 23.3 million square feet in the third quarter of 2022, a 22 percent increase from the second quarter. Meanwhile, neighborhood retail that offers in-person services continues to advance even faster. Net absorption for neighborhood centers rose by 35 percentage points compared to the year’s second quarter.

“The industrial sector continues to outperform. Demand is robust as net absorption was nearly 425 million square feet in the last 12 months ending in Q3 2022. Although demand may have tapered, the volume of industrial space absorbed continues to be double that of pre-pandemic times. As a result, this sector had the lowest vacancy rate, at 4 percent, of any other sector in the commercial real estate market. As demand remains strong, rent growth of industrial spaces continues at historic highs, rising by a double-digit percentage
(12 percent) in Q3 2022. Meanwhile, rents are rising even faster for logistics space by 13.5 percent year-over-year.”

In summary, investors might want to look for commercial real estate that’s normally recession proof — specifically multifamily or industrial properties with quality tenants.