After the strong rebound for the U.S. economy in 2021, growth in 2022 has slowed in the face of rising inflation, the household income squeeze, and geopolitical events. While the economy continues to deal with elevated inflation, data shows a slowdown in the growth of commercial real estate. Demand for apartments and office spaces is lower compared to previous quarters.
According to Green Street’s Commercial Property Price Index, prices dropped by 5% over the past 3 months as of October. Although prices are still 7.7% higher than pre-pandemic levels, they nonetheless fell by a slight 0.5% year-over-year. Rising interest rates, as well as sales in financial markets, have largely dampened commercial prices. Experts anticipate volatility and possible price drops throughout the end of 2022 into 2023.
These recent fluctuations follow a period of strong growth for commercial property prices. According to RCA’s commercial property price index based on data from May 2022, prices increased 18.6% year-over-year. This indicates that recent market shifts have driven this slight decrease.
Net leases saw the largest drops in property value at -9%, followed by malls at -5% and offices at -4%. Despite the overall decline across commercial prices, self-storage facilities saw a 17% uptick in property values, alongside lodging at 7%, healthcare at 1%, and strip retail at 1%.
CBRE’S H1 2022 Cap Rate Survey, which measures sales comps from January to early June, found that yield compression has ceased, and cap rates are starting to tick slightly upward. Survey respondents largely expect cap rates to continue to increase over the next six months, especially as borrowing costs increase. Multifamily housing continues to have the lowest cap rates at 3.2%, while office spaces have the highest at 4.9%.
Retail properties
- Strip malls in densely populated residential areas are doing well. Grocery stores, salons, fast-casual restaurants and other retailers offering in-person services are critical to the strong performance. As retail evolves, walk-in MRIs, COVID-19 testing clinics, medical providers and other tenants outside traditional retail categories may fill more shopping centers.
- Class B and C malls continue to struggle. They may be prime candidates for adaptive reuse. Their locations and proximity to parking could be used for the development of market-rate and affordable housing. Many of these malls also have dock doors and clear heights compatible with industrial use, so they can be ideal for warehouses and fulfillment centers.
Multifamily properties
- Multifamily housing remains strong. Given the rising prices and mortgage rates in the single-family housing market, people are renting for longer.
“Multifamily vacancies now stand at 4.7% as of the first quarter of 2022, below the 4.8% vacancy level we recorded in 2019,”
said Victor Calanog, Head of CRE Economics at Moody’s Analytics.
“Performance metrics remain tight, with asking and effective rents posting near-record highs in the first quarter of 2022. The new record is 8.1% effective rent growth in the third quarter of 2021—more than three times the prior record of 2.4% set in the third quarter of 2001.”
- The need for affordable housing still far outpaces supply. Adaptive reuse, modular construction and preservation are important tools in addressing the housing crisis. The biggest impact may come from public-private collaboration, such as big tech and healthcare employers working with local governments to develop workforce housing near workplaces.
Office properties
- The war for talent includes new amenities. The labor shortage persists across industries. While the hybrid workplace is here to stay, on-site work can encourage collaboration and is necessary for many occupations. Companies are hoping to entice new workers with office amenities like outdoor space, daycare and catering. Although the best amenities vary from office to office, they’re critical to finding and keeping top talent.
- Organizations may rethink how they use offices. The previous standard was several hundred square feet per employee. Hybrid work reduces the number of people in the office, which may affect that calculation. Businesses should also consider the best use of the space. If employees are only in the office a few times a week, are cubicles, open offices or a different setup the best way for them to collaborate in-person?
Industrial properties
- Industrial properties may expand their reach. Companies may opt to create single facilities for multiple business purposes, such as a shipment center with offices or a showroom. We may also see these locations add mothers’ rooms, gyms, complimentary snacks and other amenities typically reserved for offices.
- The industrial boom shows no sign of stopping. As e-commerce and demand for quick last-mile deliveries grow, so will industrial properties.
“We’re expecting some slowdown in industrial deliveries,”
Calanog said.
“Still, if more goods continue to be ordered online and industries such as life sciences emerge, demand for industrial space will likely remain robust.”

