INDUSTRIAL OVERVIEW: RENT GROWTH REMAINS STRONG DESPITE SPUTTERING DEMAND
Demand for industrial space in North America sputtered in 2023, hobbled by a host of post-pandemic economic and supply-chain issues. Among them were declining imports, retailers caught with surplus inventories and slumping receipts for furniture, appliances and building materials from a 12-year low in home sales. Additionally, there were wide expectations for an economic recession.
Net absorption totaled 164.8 million SF in the United States in 2023, a 61% drop from the 422.7 million SF of tenant growth in 2022 and a 69% decline from the record 524.7 million SF in 2021. It was 32% less than the 242-million-SF average of the five years prior to the pandemic.
It was a similar story in Canada, but the reduced demand was less acute as Canadian landlords realized stronger rent growth, 11.2% compared to 7.4% in the U.S. Canadian net absorption of 25.1 million SF in 2023 was down 12% from the 25.2 million SF of growth in 2022. It was 44.4% off the 39.9-million-SF record in 2021. The nation’s low 1.7% vacancy rate is a record. There are 48.7 million SF in the construction pipeline, 46.2% of which are in the Greater Toronto Area. About 70% of the 6.1 million SF underway in Vancouver is pre-leased. READ MORE >
OFFICE OVERVIEW: TENANT EFFICIENCIES HEIGHTENS TROUBLE FOR LANDLORDS
The drop in demand for North American office space deepened in 2023. Tenants in the United States shed 71 million SF in 2023, slightly more than in the Covid lockdown year 2020, as a renewed focus on efficient use of space led to further footprint reductions and higher overall vacancy. Demand for space in Canada also closed the year in the red.
Since the beginning of 2020, U.S. net absorption has contracted by 188.6 million SF. By comparison, absorption losses associated with the Great Recession totaled about 50 million SF. Negative net absorption was 15,798,403 in Q4 and negative 71,081,718 SF for the year. The U.S. vacancy rate is at a record 13.7%, up 420 basis points since the pandemic hit. A recent Wall Street Journal headline summed it up: ‘The Office Market Had It Hard in 2023. Next Year Looks Worse.’
Given the clear trend that tenants are reducing footprints when choosing to renew their leases or relocate, the outlook is sobering. Since nearly half of office leases signed prior to the lockdown remain unexpired, the rate of vacant space could grow more than three percentage points by 2026. Leasing volume is down nearly 20% from its average in the late 2010s, driven by deal sizes that are 20% smaller. Sublease inventory is at 206 million SF, down from its recent peak of 215 million SF but more than double its previous highs. READ MORE >
RETAIL OVERVIEW: NORTH AMERICAN RETAIL VACANCIES HIT RECORD LOWS
Despite warnings of a softening economy, North American retail property generally performed well for investors in 2023 as steady consumer spending and tenant demand pushed vacancy rates to record lows, making quality space for lease harder to come by. Net absorption in the United States in 2023 totaled 52,778,097 SF. Although growth was down nearly 30% from 2022, the overall vacancy rate fell to a record low 4%. Available space fell 200 basis points in 12 months. Annual rent growth was 3.3%, more than the 2.3% average for eight years prior to the lockdown. In addition to slowing activity, less than 50 million SF of new space was delivered in the U.S.
In Canada, the overall vacancy rate settled at a record low 1.6% at the close of 2023. Vacancy rates of 1.3% for general retail space and power centers, 1.6% for neighborhood centers, 2.3% for strip centers and 3.2% for malls were all record lows. Rent growth of 3.4% in 2023 was close to the annual average. Canadian retail has enjoyed uninterrupted growth, while the U.S. now has posted 12 straight quarters of positive net absorption.
Leases for general retail space and space in neighborhood centers account for about 90% of current net absorption. Leasing activity is dominated by spaces of 3,000 SF of less, which is overwhelmingly driven by growth from quick-service restaurants. The food-and-beverage sector accounted for nearly 20% of all leasing activity over the past year. Starbucks, Crumbl Cookies, Yum Brands and Restaurant Brands International, which owns BK, Tim Hortons, Popeyes, and Firehouse Subs, signed for dozens of new locations across the country in 2023. READ MORE >
MULTIFAMILY OVERVIEW: SUN BELT MARKETS OVERSUPPLIED, CANADIANS SQUEEZED
The North American multifamily sector is a tale of two markets. The overall U.S. apartment market underwent four quarters of healthy net absorption in 2023 yet tenant growth still was 26% short of new supply, a trend in its ninth straight quarter. The added surplus pushed up the vacancy rate to 7.5% and rents went flat for the first time since 2008-09.
It’s a different picture in Canada. Rents gained an average 7% in 2023, the vacancy rate closed at a two-decade low 1.1%, while the government announced tax cuts and other inducements for developers. Among Canada’s six major markets, Toronto and Vancouver are the largest. They combine to account for nearly half the nation’s inventory and nearly 60% of new construction. The vacancy rate in each market is 1%, the nation’s lowest. Average asking rents of $2.36 per SF in Vancouver and $2.06 per SF in Toronto are 23% and 12% more than the national average.
In the United States, there were 41,254 units leased in the fourth quarter, bringing total net absorption in 2023 to 329,313 units, a 95% increase from 169,059 units in 2022. Vacancies are up in premier properties due to overbuilding in many markets. Higher rents and economic uncertainty are depressing new lease signings in Class B and C properties.
The supply-demand imbalance has been greatest among Class A properties in the Sun Belt markets. For example, the vacancy rate in Raleigh rose from 7.7% to 11% in 12 months, while the rate of Class B and C vacancies surged by 520 basis points to 14.2%. In Jacksonville, Fla., the vacancy rate among premium units rose by 480 basis points in the past four quarters to 12.7%. READ MORE >
