Sector conditions and outlook
The apartment sector is starting to feel the effects of both capital market and economic headwinds. Demand has wavered but remains largely positive without offsetting record levels of new apartment deliveries. Capital and liquidity constraints are also negatively affecting both pricing and transaction activity within the sector.
The hotel sector remains in good shape following its recovery from the pandemic. Occupancy rates are within equilibrium ranges and RevPAR growth on a 12-month trailing basis has continued to show solid improvement. There are emerging signs, however, that the sector is beginning to show signs of slowing.
The industrial sector remains in good condition, but headwinds to both market fundamentals and investment performance continue to mount. Demand has slowed in 2023, reverting to its pre-pandemic norms, while high levels of new supply have already begun to push vacancy rates upward. Longer-term, higher interest rates, and more restrictive debt capital will slow the pace of new supply helping steady the sector.
The office sector remains vexed by subpar workplace attendance and still weakening market fundamentals. Net absorption continues to decline, and the national vacancy rate is as high as it has been since the early 1990s when the sector faced a supply overhang due to excess new development. Capital markets have ground to a halt and lending within the sector is scant due to uncertainty in the sector and exposure risk on the part of banks and life companies.
The retail sector, by most accounts, continues to outperform. Consumers have been resolute and market fundamentals are improving, unlike most other sectors at this stage in the real estate cycle. A strong job market and continued income growth have provided momentum, but there are signs that consumers may be starting to waver, which is concern for larger shopping centers. Grocery Anchored neighborhood and community centers will continue to outperform in the current environment but may come under some pressure with the specter of recession in the next 12 months.
The single-family rental sector is one of a few that are experiencing an improvement in fundamentals as demand remains healthy and rent growth is in the mid-single digits. Pressures from the supply side of the market remain a concern, but the lack of financing available for new development will curb new supply over the next 12 months.
The data center sector remains tight, with demand continuing to increase through the first half of 2023. Occupancy remains in the high 90% range and rental growth trends remain healthy as space is in short supply, which continues to be a potential headwind for the sector. Although capital markets remain a persistent headwind, this is one of the few sectors that is contnuing to see an increase in demand for space despite economic uncertainty.
Tenant demand is robust and leasing for the 2023-2024 school year outperformed expectations for both occupancy and rental rates. Tenant demand and rent increases may now be positioned to outperform traditional apartments over the near-term horizon.
Life sciences has seen both capital market and space market fundamentals pull back in 2023. Venture capital funding, a key source of growth for life science companies, has become much scarcer during the year. As a result, tenant demand has moderated considerably for lab space.
Source: Principal Real Estate, September 2023
For our detailed perspective on the conditions and outlook for each sector, please download the full U.S. Real estate sector report.
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MM11889-05 | 10/2023 | 3163201-122024