JP Morgan Chase Says CRE Asset Classes Resilient in H1

Maybe it hasn’t been as bad as it seems. An analysis by JP Morgan Chase shows that commercial real estate has remained resilient in the first half of 2023 and many of these categories have the wherewithal to continue to withstand recessionary and other headwinds.

To be sure, economic uncertainty remains high for commercial real estate through the rest of 2023, it said, pointing to the interest rate environment and the future of office space. “But there are also positives: Multifamily and industrial continue to perform well, and the industry may have underestimated the strength of neighborhood retail.”

Continued strength is showing in the multifamily sector with the national vacancy rate at 4.5% at the end of 2022, according to Moody’s Analytics, even as rent growth slowed. The median vacancy rate nationwide is 3.9% as of April.

The affordable housing supply remains a focus for developers and policymakers. A multipronged approach to growing the supply “is critical moving forward,” the report said.

“Efforts may include finding creative ways to preserve, build and finance affordable housing and working with public entities to create zoning variances that allow greater density in residential areas,” Chase said.

E-commerce remains popular but it is not the only way to obtain goods and services. It accounts for roughly 15% of retail, but services such as trips to the nail salon, barbershops, and sports bars are still desired.

E-commerce is also helping the industrial sector to stabilize, and while it’s still considered healthy, it is starting to soften after a great run.

The vacancy rate for distribution and warehouse space was at a record low of 4.1% throughout the second half of 2022 as the rate steadily declined each quarter since the end of 2020. The rate rose 10 basis points in the first quarter of 2023 to 4.2%.

The performance of office continues to be dinged by remote and hybrid work.

Class A properties are performing well and office properties with leases of 10 years or more may be able to ride out the market correction, according to the report.

But B- and C-class office buildings—especially those located with shorter leases outside prime locations—face challenges as the workplace evolves.