Just Released: IRR's Mid-Year 2024 Viewpoint Local Market Reports Aug 28, 2024

Stabilization in Property Prices Marks Turning Point in 2024
National Summary, Plus Nearly 230 Local Reports Provide Deep Dive into Commercial Real Estate Values and Trends Across Office, Industrial, Retail, and Multifamily Sectors

DENVER, CO — (August 28, 2024) — Integra Realty Resources (IRR), one of North America’s largest independent commercial real estate valuation and consulting firms, has released its highly anticipated 2024 Mid-Year Commercial Real Estate Report. The report highlights the sector’s resilience and the stabilization in property prices amid significant economic shifts.

“While the commercial real estate market continues to face challenges, our 2024 Mid-Year Report demonstrates the industry's remarkable adaptability,” said Anthony M. Graziano, MAI, CRE, CEO of Integra Realty Resources. “We are seeing a stabilization in property prices and a modest increase in values this year, marking a significant turning point. Our analysis highlights key trends such as adaptive reuse in the industrial sector, resilience in multifamily markets, innovations in retail spaces, and the evolving dynamics in the office sector as it adjusts to new work patterns. These insights are essential for stakeholders navigating the current landscape and planning strategically for the future.”

The mid-year release includes approximately 230 detailed local reports covering nearly 60 U.S. markets across four property types: office, multifamily, retail, and industrial. Additionally, IRR has provided a summary report with updated property summaries, market cycle charts, and comparison charts of market rents and vacancy rates for each property sector. This comprehensive update complements IRR's flagship Viewpoint annual report issued in January.

The reports are available for complimentary download to registered users. The summary report can be accessed at www.irr.com/research. Local market reports can be found on each local office's landing page in the research section, such as www.irr.com/City.

Key Insights from IRR's 2024 Mid-Year Report:

Office:

• Elevated Vacancy Rates and Negative Absorption: Continued across all regions, driven by remote work trends; business migration to tax-friendly states, and changes in private sector employment in many service industries.
• Resilience in Specific Sectors: Medical office and biotech in most regions are experiencing stability since these sectors are least susceptible to economic volatility and work-from-home trends.
• Major Value Trends: Limited capital availability and significant value declines in large urban markets are driving down office property prices, sometimes nearing land value. Tenant improvement costs are reducing effective returns, and the market is facing challenges in pricing due to low demand. Institutional investors are exiting long-term office holdings, with a narrow buyer pool mainly consisting of private equity acquiring downtown buildings at steep discounts. New Class A buildings, however, are leasing well, given the low supply pipeline.
• Investment Metrics from Q2 ’23 to Q2 ’24:
  • Cap Rates: Nationally, CBD Class B properties rose to 8.68%. Suburban Class A and B properties increased by 44 basis points. The East saw the largest increase for CBD Class B properties at 9.02%, while the South saw the smallest increase for Suburban Class A properties at 7.82%.
  • Market Rents: Nationally, Class A rents rose to $32.99, and Class B to $23.49. The South saw the highest growth for Class A properties at $28.83, while the West saw a decrease for Class B properties to $28.95.
  • Vacancy Rates:Nationally, Class A vacancy rates increased to 20.32%, and Class B to 20.96%. The West saw the highest increase for Class A properties at 20.63%, while the South saw the smallest increase for Class B properties at 21.30%.
• Market Cycles: Nationally, Expansion remained at 8.1%, Hypersupply increased to 19.4%, Recession stayed at 62.9%, and Recovery slightly decreased to 9.7%. Regional changes included increases in Recession in the East and West and rises in Hypersupply in the South and Central regions.

Multifamily:

• High Interest Rates: The sharp interest rate hikes in 2022 disrupted value-add buyers with projects based on low interest rates and aggressive rent growth. This led to a slowdown in new developments and investment volumes across regions, even in high-demand markets like Chicago, Los Angeles, and Atlanta.
• Strong Demand and Low Vacancy Rates: Many markets reported balance in upcoming construction supply and continued strong demand resulting in positive rent growth in cities like Grand Rapids, Detroit, Indianapolis, New Jersey, Philadelphia, Boise, Denver, and Phoenix.
• Regional Resilience: The South and West are delivering major construction pipelines from 2021, but slower rent growth and higher vacancies are emerging. Markets with new supply exceeding 3-5% of inventory are expected to see unsustainable values in the short term. The market anticipates moderation in borrowing costs to address negative leverage on pre-2022 deals.
• Investment Metrics from Q2 ’23 to Q2 ’24:
  • Cap Rates: Nationally, Urban Class A properties rose 42 basis points to 5.61%, while Suburban Class B properties increased by 37 basis points to 6.29%. The East saw the highest increase for Urban Class B properties at 6.48%, while the Central region had the smallest increase for Suburban Class B properties at 6.80%.
  • Market Rents: Nationally, Class A properties increased by 0.11% to $1,950, and Class B by 0.01% to $1,307. The East saw the highest growth for Class A properties to $2,281, while the West saw a decrease for Class B properties to $1,736.
  • Vacancy Rates: Nationally, Class A vacancy rates increased by 75 basis points to 6.65%, and Class B by 55 basis points to 4.84%. The South saw the highest increase for Class A properties to 7.16%, while the East saw the smallest increase to 6.16%.
• Market Cycles: Since Q4 '23, the multifamily market has shifted from Hypersupply to Expansion and Recovery, especially in the Central and East regions, indicating improving conditions. The market expects 2025 to mark the end of significant multifamily deliveries exceeding 3% of existing supply.

Retail:

• Demand Mixed, changing with continued Low Vacancy Rates: Retail tenant demand remains robust despite challenges in high-supply markets for Big Box and Jr. Box stores. In contrast, newer urban centers, upscale mixed-use developments, and community shopping centers are thriving. Markets like Chicago, Columbus, and Indianapolis report low vacancy rates and positive retail absorption, though consumer spending headwinds may impact the retail landscape.
• Rising Rents are evident in the South (e.g., Atlanta and Miami) and select Western cities (e.g., San Diego and Phoenix) driven by population growth and increases in population density and higher earning migration.
• Mixed-Use Developments: Increasing in the Central and East regions, with cities like Kansas City, St. Louis, and Hartford focusing on diversified retail spaces and revitalization.
• Investment Metrics from Q2 ’23 to Q2 ’24:
  • Cap Rates: Nationally, Community Retail properties rose by 10 basis points to 7.25%, and Neighborhood Retail properties increased by 9 basis points to 7.26%. The East saw the highest increase for Community Retail at 7.40%, while the South saw a decrease to 7.19%.
  • Market Rents: Nationally, Neighborhood Retail rents rose by 0.83% to $19.86, and Community Retail by 0.69% to $21.98. The South saw the highest growth for Neighborhood Retail rents, up 1.18% to $17.43.
  • Vacancy Rates: Nationally, Neighborhood Retail properties increased by 29 basis points to 10.89%, and Community Retail by 22 basis points to 10.32%. The Central region saw the highest increase for Neighborhood Retail at 13.17%.
• Market Cycles: Nationally, Expansion rose to 35.5%, while Hypersupply increased to 19.4%, Recession decreased to 14.5%, and Recovery dropped to 30.6%. In the East, Expansion fell to 0%, with Hypersupply rising to 38.5%, while the South saw Expansion grow to 59.3%. Demographic shifts into the South are driving retail expansions, although most regions are adapting retail assets to meet new tenant demands. E-commerce continues to influence smaller in-store footprints but hasn't diminished overall retail demand..

Industrial:

• Strong Demand and Rising Rents: E-commerce and supply chain needs continue to drive demand and push rental rates higher, particularly in Charlotte, Miami, Boise, and Phoenix, although speculative construction and leasing velocity slowed in most markets by Q1-2024. The strength of most industrial markets outpaced all other assets, including even multifamily, but the sector is not immune from volatility.
• Higher Vacancy Rates from New Supply: Prior increased speculative development has led to higher vacancy rates in markets like Chicago, Indianapolis, Dallas, and Los Angeles. Conversely, areas with limited new construction, such as Cleveland and Detroit, maintain low vacancy rates and limited price volatility.
• Strategic Locations: Demand and rental growth are sustained by strategic locations and infrastructure improvements, especially in Chicago, Kansas City, Raleigh, and Northern New Jersey. Regions with industrial land constraints and a strong manufacturing workforce, like those benefiting from automotive and onshoring expansions, continue to thrive.
• Adaptive Reuse: The conversion of older industrial buildings and underutilized properties into modern industrial facilities is gaining momentum, driven by the scarcity of industrial land in major cities. This trend is helping to support market prices for remaining inventory.
• Investment Metrics from Q2 ’23 to Q2 ’24:
  • Cap Rates: Nationally, Warehouse cap rates increased by 23 basis points to 6.42%, while Flex Industrial properties rose by 17 basis points to 6.93%. The East saw the highest increase for Warehouse properties at 44 basis points to 6.92%, while the Central region had the smallest increase at 7 basis points to 7.13%.
  • Market Rents: Nationally, Warehouse rents rose by 3.06% to $7.57, and Flex properties increased by 2.91% to $12.00. The East experienced the highest growth for Flex properties, up 3.88% to $13.02.
  • Vacancy Rates: Nationally, Warehouse vacancy rates increased by 181 basis points to 6.30%, while Flex Industrial properties rose by 100 basis points to 6.96%. The West saw the largest regional increase for Warehouse properties, up 247 basis points to 6.49%.
• Market Cycles: Since Q4 '23, the national industrial market saw Expansion decrease to 45.2%, Hypersupply increase to 43.5%, Recession remain at 4.8%, and Recovery increase to 6.5%. In the East, Expansion remained stable at 38.5%, with a decrease in Hypersupply to 38.5%.

IRR's mid-year report serves as a launching point for stakeholders seeking to inform their decision-making processes and strategic efforts on a macro and regional market basis. To download IRR’s mid-year commercial real estate reports, visit www.IRR.com/research.