Intelligent Investment
2023 U.S. Real Estate Market Outlook Midyear Review
September 12, 2023 10 Minute Read
Economy
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Recession Ahead
Forecast made in January 2023
Sharply higher interest rates will weigh on the U.S. economy in 2023. Home prices and retail sales will decline and unemployment will rise. The U.S. dollar’s continued strength against other currencies will further squeeze corporate earnings and export sales, limiting business investment. As a result, CBRE expects a recession in 2023.
Midyear review
CBRE now expects economic growth to slow in late 2023 with a moderate recession continuing into early 2024. As a result, CBRE has adjusted its 2023 GDP growth forecast upward to 2.0% and 2024 growth forecast downward to 0.7%.
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Peak Interest Rates
Forecast made in January 2023
The Fed will continue to hike interest rates to curb high inflation. The federal funds rate is projected to peak at around 5.0% in mid-2023, ending the steepest rate-hiking cycle in history.
Midyear review
The U.S. economy has proven more resilient than we expected at the beginning of the year. The federal funds rate is higher than we expected at a range of 5.25% to 5.5% and is likely to remain there for the rest of this year. We now believe rate decreases will start in 2024 and the federal funds rate will end the year at 4.5% to 4.75%. We also see the 10-year Treasury rate ending 2023 at 4.0% and 2024 at around 3.5%.
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Steep Downturn not Expected
Forecast made in January 2023
Although we expect a recession later this year, we are not overly pessimistic. The U.S. consumer has low leverage and a relatively strong balance sheet. The digital economy and the reshoring of manufacturing—particularly semiconductor production—are two significant growth drivers.
Midyear review
CBRE expects a moderate recession in the U.S. from late 2023, extending into early 2024, with a mild increase in unemployment to around 5%. Nevertheless, higher interest rates will weigh on growth in the second half of 2023. Other headwinds include the restart of student loan payments, which will inevitably impact consumer spending as disposable income decreases and excess savings are drawn down.
Figure 1: Quarterly GDP Growth With Forecast (%)
Source: CBRE Research, September 2023.
Figure 2: H2 2023 Economic Forecast
Source: CBRE Research, September 2023.
Capital Markets
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Investors Cautious Amid Interest Rate Uncertainty
Forecast made in January 2023
More than half of the respondents to CBRE’s 2023 U.S. Investor Intentions Survey said they would decrease their purchasing activity in 2023 compared with 2022. Investors cited rising interest rates, a potential recession and limited credit availability as their greatest challenges in 2023.
Midyear review
Investors have remained cautious in 2023, with investment volume down by 60% year-over-year in Q2. Uncertainty about interest rates and the economic outlook, along with tighter credit conditions, are the primary obstacles to increased deal flow. However, we expect that more stable conditions toward year-end will lead to a pickup in investment activity.
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Cap Rate Compression Expected in H2 2023
Forecast made in January 2023
Despite a lack of comparative sales, anecdotal evidence suggests that cap rates for prime U.S. assets across most property types increased by 100 to 150 basis points (bps) in 2022. If the Fed continues to raise interest rates, cap rates are forecast to increase by another 25 to 50 bps. Cap rates will peak in Q2 2023 for most sectors, with those for offices peaking in Q3. Yields will compress in the second half of the year.
Midyear review
Amid continued resilience of the U.S. economy and the federal funds rate at a higher range than previously expected, cap rates have increased by approximately 125 bps for most property types—albeit with wide variation by market—and closer to 200 bps for office assets. Cap rate stabilization is expected by early 2024 for all property types except office, which will not stabilize until midyear.
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Capital Markets Conditions to Improve in Second Half of Year
Forecast made in January 2023
Tightening financial conditions and the deteriorating economic outlook will weigh on commercial real estate investment in H1 2023. However, should interest rates stabilize, conditions may be conducive for a healthy recovery in H2 2023. CBRE forecasts 2023 investment volume to decline by 15% from 2022 levels.
Midyear review
Economic resilience and higher interest rates have caused CBRE to lower its investment volume forecast. A broad-based recovery that was expected to begin in late 2023 will now not begin until early 2024. Investment volume is forecast to decline by 37% year-over-year in 2023 and increase by 15% in 2024, as greater certainty around interest rates and the economic outlook supports stronger purchasing activity.
Key changes to forecast
Revised yield forecast
- Given a resilient economy and persistent inflation, CBRE has extended its forecast for a recovery in investment volume and stabilization in cap rates by roughly one to two quarters, pushing expected improvements into 2024.
- CBRE now projects cap rate expansion to continue through the end of 2023. However, we expect increases to slow for the rest of the year, with cap rates up 125 bps across property types and well over 200 bps for office.
- Cap rates are forecast to stabilize in early 2024 except for office assets, which should see continued expansion until the middle of next year.
- An interest rate cut is not expected until early 2024 and the 10-year Treasury rate will end 2023 at 4.0% before falling closer to 3.5% in late 2024.
Figure 3: Americas Investment Volume
Source: MSCI Real Assets, CBRE Research, Q2 2023.
Office
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Supply
Forecast made in January 2023
High availabilities will keep developers and construction lenders on the sidelines in 2023. Less than 38 million sq. ft. of new space is slated for delivery in 2023, down by 27% from the five-year average. A thinning construction pipeline will reduce supply-side risks over the next few years, likely resulting in a shortage of prime office space in the long term.
Midyear review
Construction deliveries totaled 14.7 million sq. ft. in H1 2023. For the full year, CBRE forecasts deliveries totaling 37.5 million sq. ft., the lowest annual amount since 2014. Total office space under construction fell by 11% from year-end 2022 to 63 million sq. ft., accounting for 1.4% of total inventory. The construction pipeline continues to shrink, reducing supply-side risk to vacancy. Vacancy rates for prime space will return to normal levels more quickly than for lesser-grade space.
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Demand (Net Absorption)
Forecast made in January 2023
Demand for prime office space, even if for smaller requirements, will remain strong. A smaller pool of tenants will be interested in older office buildings. Fast-growing and popular Sun Belt markets, including Austin, Dallas, Miami and Nashville, will remain in favor.
Midyear review
Buildings constructed since 2010 continued to see positive absorption. Smaller leases prevailed: The average lease size in H1 2023 was 28% less than the H1 2018/19 average. Nashville had the most net absorption of any U.S. market in H1 2023 despite new construction deliveries adding 4% to its total office inventory over the past four quarters. Demand in all other Sun Belt markets cooled amid economic uncertainty.
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Vacancy
Forecast made in January 2023
Older buildings with outdated amenities will struggle to attract tenants, leading to obsolete space that will inflate the overall U.S. office vacancy rate over the long-term. While office conversion activity will rise over the next few years, it will represent only a small share of total U.S. office inventory due to feasibility issues.
Midyear review
Negative net absorption and new supply pushed the overall office vacancy rate up by 90 basis points (bps) since year-end 2022 to 18.2%, a 30-year high. The vacancy rate for buildings constructed since 2010 was 14.4% in Q2 2023, which was 3.8 percentage points below the overall vacancy rate. While 2023 is shaping up to be a banner year for office building conversions to other uses like residential, they account for less than 2% of total U.S. office inventory.
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Rent Growth
Forecast made in January 2023
A continued flight-to-quality trend will drive rent growth for top-tier office buildings. However, elevated vacancies in older buildings, new space deliveries and increasing sublease space will put pressure on overall rent in 2023.
Midyear review
Average asking rent was unchanged in H1 2023 at $35.45 per sq. ft. Asking rents have remained stable as the demand for prime space has allowed landlords to keep face rents firm, while increasing concessions. Improvement in net-effective rents has slowed and been limited to top-tier properties.
Key changes to forecast
CBRE has revised its expectation of a recession to early 2024 from late 2023. This outlook has in turn pushed to late 2024 the likelihood of the overall office vacancy rate peaking and average rent bottoming out. Continued uncertainty about long-term hybrid working arrangements and concerns about the economic outlook are causing many tenants to delay leasing decisions. Although vacancy rates likely will remain structurally higher in many markets, active tenants in the market suggest that leasing activity will eventually rebound and support the start of an office recovery once economic conditions stabilize.
Figure 4: U.S. Office Net Absorption, Completions & Vacancy
Source: CBRE Econometric Advisors, Q2 2023.
Industrial & Logistics
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A “New Normal” for Leasing Activity
Forecast made in January 2023
Leasing activity is expected to decline from 2021-2022’s record and unsustainable pandemic-fueled pace. CBRE forecasts annual leasing activity to be well above the pre-pandemic average of 550 million sq. ft., finishing 2023 at 725 million sq. ft.
Midyear review
Leasing volume in H1 2023 totaled 372.7 million sq. ft., putting total annual volume on course for 744 million sq. ft.
Robust renewal activity has underpinned leasing volume this year, with 35% of all lease transactions in Q2 consisting of renewals. Companies are opting for renewals due to heightened economic uncertainty and as a way to attract and retain staff in what is still a very tight labor market.
Leasing has been solid for smaller industrial facilities. Leases for units of 25,000 sq. ft. to 100,000 sq. ft. are slightly lagging last year’s pace, while those for units of less than 25,000 sq. ft. are up year-over-year.
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Availability to Remain Tight
Forecast made in January 2023
Despite record construction completions, continued demand from large occupiers will ensure availability remains tight, leaving the vacancy rate in the 3.3%-to-3.6% range by year-end. Economic uncertainty and difficulties in securing construction financing will cause a sharp drop in construction starts, leading to even greater undersupply of space in late 2024.
Midyear review
Leasing activity for blocks of 300,000 sq. ft. or more fell by 29% year-over-year in Q2 2023 as Fortune 500 companies put expansion plans on hold until there is greater economic clarity.
New supply exceeded 100 million sq. ft. for a fifth consecutive quarter in Q2 2023. A large amount of new supply consists of facilities totaling more than 300,000 sq. ft.
Leasing activity for blocks of more than 300,000 sq. ft. has seen the greatest slowdown, leading to an increase in vacancy rates.
Although the overall vacancy rate ended Q2 2023 at 3.7% and could reach 4.5% by year-end, a reduction in construction starts will push the rate down by mid-2024.
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Double-Digit Rent Growth to Continue
Forecast made in January 2023
Continued low vacancy rates and solid leasing activity will result in annual rent growth of between 12% and 15% in 2023.
Midyear review
The industrial market remains on course for double-digit rent growth this year. Average first year base rent grew by 16.6% in H1 2023.
Rent growth has shifted away from the gateway markets of Los Angeles and Northern New Jersey to markets with strong population growth like South Florida, Atlanta and Las Vegas and with well-established logistic hubs such as Philadelphia and Reno.
Key changes to forecast
Upgraded
- Leasing activity could reach 750 million sq. ft. by year-end due to a pickup in activity from large users. This could result in stronger demand for larger spaces in Q4 2023.
- Higher-than-expected rent growth in emerging markets could push annual rent growth to just under 15% by year-end.
Downgraded
- With tenant requirements continuing to lag new construction completions, vacancy rates will increase more than initially expected. However, any oversupply will be confined to larger facilities, which will be gradually absorbed over the course of 2024 as new construction levels decline.
- Economic uncertainty is weighing on demand from third-party logistics companies (3PLs). CBRE’s initial forecast was for 3PL market share to reach close to 40% in 2023 but we now project it will decline as food & beverage and auto-related users expand.
Figure 5: U.S. Industrial Leasing Activity by Occupier Type
Source: CBRE Research, Q2 2023.
Multifamily
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Supply
Forecast made in January 2023
CBRE expects 350,000 units to be completed in 2023—141,000 in H1 and 210,000 in H2, based on data from Dodge Data & Analytics.
Midyear review
Construction deliveries totaled 152,000 units in H1 2023, slightly more than initially forecast. CBRE now projects annual completions totaling 450,000 units this year.
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Demand (Net Absorption)
Forecast made in January 2023
Absorption of 228,000 units is expected in 2023, lagging the delivery of 350,000 units.
Midyear review
Absorption totaled 71,000 units in H1 2023, almost double our initial expectations. CBRE’s updated outlook is for annual absorption of 307,000 units this year, up from our earlier expectation of 228,000 units. This forecast is based on the nearly 40,000 more units absorbed than initially expected in H1 2023 and an upward revision combined with a later-than-expected economic downturn in late 2023.
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Vacancy
Forecast made in January 2023
CBRE expects a rise in the vacancy rate due to a robust supply pipeline and an economic slowdown causing less demand. The vacancy rate is forecast to climb by 60 bps to 5.2% at year-end.
Midyear review
An economic downturn that will persist well into H1 2024 and the completion of an additional 100,000 units of new supply in 2023 will cause the vacancy rate to peak at 5.4% in Q2 2024. Supply and demand dynamics will then rebalance and vacancy will drift back down toward its long-run equilibrium rate of 5.0% by Q2 2025.
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Rent Growth
Forecast made in January 2023
CBRE expects above-average effective rent growth of 3.5% in 2023 and 2.3% in 2024.
Midyear review
CBRE has reduced its full-year rent growth forecast to 2.2% for the following three reasons:
A lowering of our CPI inflation expectations to 3.7% from 4.0% for the year, which will have a one-for-one downward effect on nominal rent growth projections.
A downgrade to our employment outlook.
Significant deviations from earlier expectations in quarterly data for numerous markets.
Key changes to forecast
Upgraded
- The urban hubs of Chicago and New York have some of the largest upward revisions to rent growth forecasts now that the COVID pandemic has ebbed and new supply was limited over the past year.
Downgraded
- Many Sun Belt markets such as Austin and Phoenix, which had annual rent growth of more than 20% in 2021, now have a supply-and-demand imbalance that is weighing negatively on fundamentals. For most of these markets, CBRE now anticipates modestly negative rent growth for most of 2024, with a steady rebound beginning in 2025/2026 before settling into a stable long-run average.
- Although San Francisco has not had a wave of new supply, the combined impact of tech industry cutbacks, workers moving out of the city and the relatively slow return to the office have caused rent growth to lag well below initial expectations.
- Many West Coast markets have also seen a slow return of residents as their higher cost of living is a large barrier to reentry, further straining rent affordability.
Figure 6: Multifamily Rent Growth Forecast
Source: CBRE Research, CBRE Econometric Advisors, August 2023.
Retail
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Lack of New Supply will Boost Retail Sector Fundamentals
Forecast made in January 2023
The rebound in brick-and-mortar retail sales is expected to continue in 2023. Although high inflation, rising interest rates and labor shortages will remain headwinds, high construction costs and tight availability should ensure that retail fundamentals remain stable.
Midyear review
Retail fundamentals remain strong despite sustained headwinds. A slowdown in retail expansions, combined with key retail closures such as Bed Bath & Beyond, Tuesday Morning, Christmas Tree Shops and others, might have turned absorption negative in years past. However, retail availability remains extremely tight, standing at a record-low 4.8%.
The lack of new construction has helped balance supply and demand, with forecasts suggesting that current high levels of occupancy will continue.
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Mobile Commerce to Expand
Forecast made in January 2023
Retail sales transacted through mobile devices, known as m-commerce, are expected to account for 47% of all e-commerce sales in 2023, rising to 58% by 2027. According to Forrester, “digitally influenced” retail sales, where consumers research products online but buy or pick up in stores, will represent 62% of total retail sales in 2023 and 70% by 2027.
Midyear review
Our initial forecast for m-commerce growth is inconclusive as Q2 sales data is not yet available. However, e-commerce’s share of total retail has returned to its steady growth rate from pre-pandemic levels. Based on U.S. Census Bureau data, CBRE estimates that e-commerce’s share of total retail is 20.8%.
Retailers continue to design stores to align with the rise in retail app use and mobile devices. Quick-service restaurant designs are including separate counters and/or multiple drive-thrus to accommodate third-party app delivery. Other innovative retailers have dispensed with traditional check-out counters in favor of store associates equipped with point-of-sale mobile devices.
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Retail Space Productivity will Remain Strong in 2023
Forecast made in January 2023
Retail sales per sq. ft., which rose sharply over the past five years, are expected to slow in 2023 before rising again the following year. Continued supply side constraints will limit expansion by retail occupiers, who prefer to wait for prime space rather than invest in lesser trade areas, especially as development costs remain inflated. Retail real estate fundamentals should remain resilient despite economic challenges next year.
Midyear review
Retail spending was more than expected, up by 3.2% in H1 2023 compared with the same period a year ago as the U.S. economy remained resilient. We expect a further 3.3% increase in H2. Unemployment is low, wage growth is high and households have solid debt-to-income ratios.
New retail construction remains relatively low, totaling less than 12 million sq. ft. in H1 2023.
The resumption of student loan payments in October 2023 could lower consumer spending beginning in Q4.
Key changes to forecast
Overall, more markets have been downgraded than upgraded. This is because some markets have begun to experience negative absorption and rising availability rates. U.S. retail assets remain strong, however, with even the downgraded markets forecast to have strong rent growth.
Upgraded
- The rent growth outlook for San Francisco has been upgraded after strong gains in Q2 2023 as the market continues its recovery.
- Miami’s strong performance is being driven by a significant amount of new apartment and condo construction along with a tight availability rate.
- Houston leads U.S. markets in new retail construction year-to-date and has the most existing supply.
Downgraded
- While Manhattan and Los Angeles have seen the largest downgrades, both remain among the top markets in terms of forecast asking rent growth, partly due to the strength of their high-street districts.
- Phoenix recorded the second-highest net absorption of any market in Q2 2023. Although CBRE has lowered its asking rent forecast, the city remains a strong retail market.
- Sluggish rent growth in Q2 2023 has led to the reevaluation of asking rents for Boston.
Figure 7: Retail Rent Forecast
Note: Primary retail markets, which includes those with most supply of neighborhood, community & strip centers, plus Manhattan and San Francisco.
Source: CBRE Econometric Advisors, Q2 2023.
Hotels
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Return of International Travel
Forecast made in January 2023
Easing of travel restrictions in China and Japan should boost U.S. hotel demand in 2023. Inbound international visitation in 2022 was 71% of 2019’s level; however, inbound international travel from Japan and China was just 27% of 2019’s level, leaving sizeable upside potential in the new year.
Midyear review
The gap between U.S. inbound (+9%) and outbound (-22%) international travelers widened in H1 2023 compared with pre-pandemic H1 2019. Although continuing to improve, the pace of inbound international travel has been slower than expected due to less-than-expected visitation from China and Japan. Through July, inbound visitation from China and Japan was just 41% of 2019’s levels. As a result, we have lowered our 2023 expectation for RevPAR growth to 4.6% from 6%.
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Resurgence of Group and Business Travel
Forecast made in January 2023
The steady return of group and business travel should support further demand growth in 2023. Group and business room night bookings were at 93% and 87% of pre-pandemic 2019 levels last year.
Midyear review
Group and business travel increased by 7% and 17% year-over-year in H1 2023, respectively, both reaching 96% of 2019’s levels. We expect the continued improvement in group and business travel to boost hotel demand in H2 2023 and H1 2024.
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Margins will be Under Pressure in 2023
Forecast made in January 2023
A combination of moderating average daily rate (ADR) gains, higher-than-national-average wage growth, rising insurance premiums, labor shortages and other operating expenses will result in lower margins in 2023.
Midyear review
Hotel revenue growth was positive but decelerated in H1 2023 and gross operating profit margins declined by 2.1 percentage points. We expect ADR growth to moderate further to 1.9% in H2 2023. This slower growth, coupled with stubbornly high wage growth of 5.5%, means margins likely will continue to fall, impacting hotel profitability.
Key changes to forecast
RevPAR Forecast Upgrades
- We have raised our earlier 2023 RevPAR growth forecasts by an average of 1.9 percentage points for roughly one-third of the markets we track. We expect East Coast urban markets like Washington, D.C. and New York, as well as some smaller drive-to markets, will outperform.
RevPAR Forecast Downgrades
- Markets that outperformed early in the recovery are experiencing declining RevPAR as travel patterns have started to normalize. As a result, we have tempered our expectations for growth in markets like Miami, Austin and Saint Petersburg.
- As a result of the slower-than-expected recovery of visitors from Asia and the continued impact of remote work, CBRE Hotels Research expects that West Coast markets will continue to lag 2019 RevPAR levels through 2023.
- We have lowered our RevPAR growth forecasts for nearly 70% of the top 65 U.S. hotel markets by an average of 3 percentage points.
Figure 8: 2023 RevPAR by Market, Current vs. Original Forecasts
Source: CBRE Hotels Research, Kalibri Labs, Q2 2023.
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