2023 Q4 Databook

April 2, 2024 Jamie Woodwell; Reggie Booker

The U.S. economy ended 2023 on a strong note and has remained more resilient than many had anticipated.

The gross domestic product grew at a seasonally adjusted annual rate of 3.4 percent in the fourth quarter, down from 4.9 percent in Q3 but otherwise the strongest showing since the end of 2021.  Consumer expenditures remained robust, with spending on goods growing at a real rate of 3.2 percent per year and spending on services growing by 2.8 percent.

The job market has been equally steady, adding a seasonally adjusted average of 212,000 jobs per month during Q4 and 229,000 in January and 275,000 in February.  While viewed as a less reliable gauge than the establishment survey that provides the numbers above, the household survey has shown a declining number of employed workers in recent months, contributing to an uptick in the unemployment rate to 3.9 percent in February after three months at 3.7 percent.  

The still tight labor market has helped elevate hourly earnings 4.3 percent higher than they were a year ago.  The drop-off in headline inflation to 3.2 percent in February (from its January 2022 peak of 9.2 percent) means that earnings growth is once again outpacing the rise in prices.

Balancing inflation, labor market strength and the Fed Funds Rate, which they have held steady since last summer, the Federal Reserve continues to signal patience and a focus on incoming data.  Ten-year Treasury yields have spent most of this year above four percent while SOFR has spent it above 5 percent.

Commercial property markets are dynamic, with different property types moving in different directions, and significant variation by property type and subtype, market and submarket, quality, vintage and more.

In September 2022, we wrote a white paper looking into office demand in a post-pandemic world.  The paper started: “Work-from-home has brought an existential question to the office market.  Two-and-a-half-years into the pandemic, with office properties currently at 40 percent of their pre-pandemic occupancy, what’s ahead for the sector?”  

Now, another year-and-a-half later, that question remains largely unanswered, although we are starting to see some trends.  Offices have seen an uptick in usage, particularly mid-week, with significant variation between markets and submarkets.  And location and property quality definitely matter.  In a recent note, JP Morgan noted, “Focusing on the NYC office market and using a sample of SASB office properties, we estimate that workers are returning to the office at a rate of 78% of their 2019 levels and workers are commuting to the office more during the middle of the week. Additionally, people who work in the Times Square neighborhood are returning to work at a higher rate relative to those who work in other NYC neighborhoods.”

We are starting to more clearly delineate the “survivors” – buildings that are attracting new leases and owners that are investing in the TI and other elements of keeping a building going.  Those buildings will attract capital, and with it new tenants.  As other buildings and owners struggle, the universe of available office space will decline, bringing greater balance.

As we’ve noted before, there are certain similarities between where the office market is today and where retail was a number of years ago.   Questions about the future of malls and a general “over-retailing” of the United States cast a pall over investing and lending on retail properties.   Consistent economic growth and the strength of the consumer has turned that narrative around.  Retail is now among the more favored property types.

JLL’s Q4 Retail Outlook noted, “Retail net absorption surged 37.2% quarter-over-quarter to 17.6 million s.f. – boosted by a significant jump in mall net absorption. Conversely, deliveries decreased 5.1% from the previous quarter. With little new construction and rising absorption, vacancy fell 20 basis points to 4.0% - the lowest on record since 2007.”


After a number of years of demand significantly outstripping the supply of apartments, developers ramped up building activity and the reverse is now true.  An annualized pace of more than 500,000 multifamily units were delivered in December and January, compared to just more than 350,000 delivered in 2022.  And there remain nearly one million more units currently under construction.

That new supply has brought the multifamily rental vacancy rate from 6.5 percent at the end of 2022 to 7.7 percent as of the end of 2023.  Following the dictates of Econ 101, the rent pressure we saw when demand exceeded supply has softened.   A new series from the Bureau of Labor Statistics that track the rents paid by newly signed tenants showed those asking rents in Q4 2023 declined 4 percent from a year earlier.   Because rents of in-place tenants were still catching up to the previous increases, Q4 rents for all tenants increased 5.3 percent from a year earlier. 

The moderation in rent growth will bring relief to many tenants and potential challenges to some owners whose expenses outpace income growth.   It is also unlikely to significantly aid the many renter households whose incomes are below what it costs to build and maintain housing and who depend on some form of subsidy to make up the gap.

Industrial market dynamics are – in broad terms – similar to those in multifamily.  The onset of the pandemic led to a surge in demand that easily exceeded existing supply – driving vacancies lower and rents higher.   Strong new development followed, bringing with it higher vacancy rates and more stability to rents.  That, in turn, has slowed the development pipeline.  On their Q4 earnings call, Prologis noted, “In closing, we know that the market is not yet out of the woods with regards to incoming supply, but the combination of a stronger backdrop, continued low level of starts, and a calmer capital markets environment has us optimistic that 2024 will be another great year.”