With the country in the grips of elevated economic uncertainty, some investors are pushing the pause button. But Marcus & Millichap's global director of research and advisory services, John Chang, said investors should consider one important question: What were you doing five years ago?
“Normally, I couldn't tell you what I was doing five years ago, but this week, I actually do know,” he said in a research video. “I was transitioning to a whole new world. My entire team was shifting to working from home as the COVID outbreak hit like a tidal wave.”
Chang said the world has faced some of the most extreme uncertainty and disruption during the past five years, yet the commercial real estate market has remained a relatively strong investment option. Looking at the four major property types illustrates this stability.
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Office vacancy was 12.2% before the pandemic. It surged to 17.1% in the second quarter of 2024 and has now come down to 16.7%. Total absorption since the pandemic has been negative overall but positive last year, and rents have been up 1.7% since 2019. Office prices are up about 2% per square foot, and the average cap rate is 80 basis points higher than in 2019, at 7.9%.
For the retail sector, vacancy is down 20 basis points to 4.5% since before the pandemic, and absorption has stopped at 206 million square feet over the past 5 years. Average rent is up 15%, and the average price per square foot is up 12%. Retail cap rates are up 40 basis points to about 6.8%.
Industrial properties had a pre-pandemic vacancy of 4.8%, which has grown to 6.9%, as of the end of 2024. That reflects a record 2 billion square feet of new construction. Absorption has been 1.5 billion square feet, while average rents are up 40.5%, and prices are up 60% per square foot. Cap rates have remained relatively stable in the industrial sector over the past five years.
Finally, a record wave of multifamily developments over the past five years added more than two million new apartment units, pushing vacancy to a peak of 5.9% last year. That has now dropped to 5.2% as 660,000 units were absorbed last year. Rents are up 28% since 2019, and prices are up by about 20%. Cap rates are 70 basis points higher than in 2019, at about 6% on average.
Overall, suppose you bought commercial real estate at the beginning of the pandemic when uncertainty was off the charts. In that case, you've probably done pretty well unless you bought a 1980s vintage urban office tower, which is still facing a tough time, said Chang, who encouraged today’s investors to look past the current noise.
“Today, uncertainty is once again extremely high,” said Chang. “We're facing tariffs, deportations, the DOGE layoffs, and the dismantling of government departments. We have risks of reigniting inflation and the possibility of a recession or even stagflation. But at the end of the day, commercial real estate investors need to think long term. Construction is dropping, the demographics are favorable, and the US economy has tremendous underlying strength.”
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
