Commercial Real Estate: US

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Vancancy Rate

Multifamily

• Vacancy ticked up 13 basis-point (bps) to end Q1 at 4.71%. This was the biggest jump over the past two years, which pushed the current vacancy over the pre-pandemic level of 4.68%.
• Compared to year end 2022, rent declines became more widespread in the first quarter, with 60 primary metros recording negative market rent growth ranging from -0.1% to -6.4%. At the national level, asking/effective rent declined by 1%/0.9% respectively.

In Square feet	Q1 2023	Q4 2022	Q1 2022	Q/Q	Y/Y
Vacancy Rate	4.70%	4.60%	4.70%	0.10%	0.00%
Asking Rent (per unit)	1,781.0	1,798.0	1,682.0	-0.90%	5.90%
Effective Rent (per unit)	1,707.0	1,724.0	1,610.0	-1%	6.00%

Office

• Vacancy rose to 19.0%, up 20 bps from a quarter-ago due to oversupplied stock and exceeding the pandemic peak of 18.5%. Office vacancies rose for the 5th consecutive quarter, another step closer to its historic peak of 19.3% in 1991
• Asking rents increased by 0.4% in Q1 despite the rise in vacancies, likely an outcome of inflationary pressures.
• . At the national level, more than 5 million square feet (sqft) was released back to the market this quarter. Meanwhile, construction slowed further with just over 3 million sqft of new space delivered in Q1.

In Square feet	Q1 2023	Q4 2022	Q1 2022	Q/Q	Y/Y
Vacancy Rate	19.00%	18.80%	18.10%	0.20%	0.90%
Asking Rent (per SF)	35.30	35.16	34.60	0.40%	2.00%
Effective Rent (per SF)	28.13	28.06	37.65	0%	1.70%

Retail

• Vacancy flatlined at 10.3% over the past four quarters.
• Asking/effective rents were up slightly by 0.2%/0.3% in Q4 and remained in the $21/$18-per-sqft range, a level unchanged since 2018.

In Square feet	Q1 2023	Q4 2022	Q1 2022	Q/Q	Y/Y
Vacancy Rate	10.30%	10.30%	10.40%	0.00%	-0.10%
Asking Rent (per SF)	$     21.52	$     21.47	$     21.40	0.40%	2.00%
Effective Rent (per SF)	$     18.81	$     18.76	$     18.70	0%	1.70%

The U.S. will end the decade with 1.1 bsf of vacant office space, 740 msf of which qualifies as normal or natural vacancy and 330 msf of which qualifies as excess vacancy attributable to remote and hybrid strategies. The overall level of vacancy will therefore be 55% higher than was observed prior to the pandemic. Softness in the market will not be equally distributed. Currently, buildings with greater than 50% vacancy comprise 7.5% of total inventory.

Prior to the pandemic (Q4 2019), average office employee density measured at 190 sf per employee.4 The ratio declined by 7.9% over the last three years and is expected to tighten further as remote and hybrid work ecosystems evolve.

Cushman & Wakefield estimates that one-third of office leases scheduled to expire between 2020 and through 2030 have occurred as of the end of 2022, implying two-thirds of a shift in space usage is yet to come.6 If so, office space per employee would decline by another 23.7% (i.e., the current observed downshift of 7.9% multiplied by three), ultimately settling in around 144 sf per employee.

Refinancing Risks

CRE DEBT Maturities

More than 50% of the $2.9 trillion in commercial mortgages will need to be renegotiated in the next 24 months when new lending rates are likely to be up by 350 to 450 basis points. MS & Co. analysts forecast a peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis.

• Roughly $400-450bn worth of CRE loans are scheduled to mature in 2023. This is on par with 2022, and both of those years are the largest on record. From there it doesn't get any easier, as maturities climb each year until 2027, reaching over $550bn.

Defaults

Distressed U.S. commercial real estate debt rose to a 14-year high of 5.2% in February.

Total distressed CMBS debt jumped to $1.84 billion from January’s $686 million.

• Office properties accounted for about 44% of all defaulted commercial mortgage-backed security debt transferred in February to special servicers to work out payments, according to CMBS data firm Trepp.
• Debt backed by retail properties comprised 32%, and multifamily 19%.

• "We anticipate a lot of loans to reach their maturity date and be unable to fully pay off or refinance," Trepp's Jack LaForge said in an e-mail. "In order for special servicing rates to go down, lending conditions would have to soften a lot, and interest rates will have to go down for this to be possible.”

The delinquency rate on commercial real estate loans at U.S. banks went up in the fourth quarter of 2022 after declining sharply a quarter earlier.

Loans more than 30 days past due and those in nonaccrual status constituted 0.65% of CRE loans at the end of the quarter, up from the delinquency rate of 0.58% as of Sept. 30, 2022, according to an S&P Global Market Intelligence analysis.

Despite the uptick in the fourth quarter of 2022, the CRE loan delinquency rate was down 6 basis points from the end of 2021.

The number of U.S. banks exceeding regulatory guidance on CRE loan concentration increased for the seventh straight quarter. The count climbed in the fourth quarter to reach 567 as of Dec. 31, 2022, from 539 at the end of the linked period and 421 a year ago.

Exposure

banks-ranked-by-projected-cre-losses

Banks

Banks hold the majority of CRE mortgages by volume, with 61% of total CRE debt residing on their balance sheets (excluding multifamily). While smaller banks have more aggregate exposure to CRE, the exposure at larger, wholesale banks tends to be riskier.

• CRE accounts for 24% of total industry loans outstanding, but CRE represents just 13% of total loans at large banks, while accounting for 44% at small banks
• In the 2022 stress test, under the severely adverse scenario, CRE values decline by 40% over 2 years, and the aggregate losses for the banks tested represented 9.8% of total CRE loans
• Both the noncurrent loan rate and net charge-off rate for bank CRE loans remain at historically low levels