U.S. Real Estate Sector Report

Fall 2024

October 11, 2024 | 25 min read
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Sector conditions and outlook

Key:

Improving
Neutral
Deteriorating
Positive
Moderately positive
Neutral
Moderately negative
Negative
Apartment

The apartment sector is beginning to see stabilization in market fundamentals. Strong demand is starting to offset supply-side issues that have troubled several Sunbelt markets. While rental trends remain flat, there are signs that the pricing pendulum may be shifting in favor of landlords. The sector continues to be a favorite among investors, with debt capital remaining available from all sources.

Current conditions:
Outlook:
Hotel

Sector performance is generally healthy, with occupancy rates stabilizing above historical trends. However, demand across leisure segments has underperformed, as weaker labor dynamics have affected consumer discretionary spending. Debt capital remains available to the sector, but a weaker business environment could pose challenges going forward.

Current conditions:
Outlook:
Industrial

The industrial sector continues to face dual headwinds of slower demand and strong new supply. However, net absorption has rebounded from its early-year decline, as both e-commerce retailers and 3PLs have increased leasing activity in the second half of the year. The sector remains well-capitalized, and investment activity appears to be picking up. Higher interest rates and weaker market performance have reduced underconstruction activity by more than 50% from its peak, which should help markets adjust in the near term.

Current conditions:
Outlook:
Office

The most recent data suggest signs of life for office demand, though much remains to be done for a sustained recovery. Individual asset valuations are still in a corrective phase, which will take more time to resolve. Some opportunistic investors have begun entering the market to capitalize on pricing dislocations. While in-office attendance has improved, it remains well below pre-pandemic levels, and hiring in office-using industries—a key demand driver—has been modest in the second half of 2024.

Current conditions:
Outlook:
Retail

The retail sector has outperformed on several measures and remains among the top performers in commercial real estate. Valuations appear to have stabilized, and the lack of new supply has helped maintain healthy occupancy levels. Consumer spending at brick-and-mortar stores has grown moderately, but there are concerns that household balance sheets may lead to a reduction in discretionary spending. Slower economic growth remains a risk, but neighborhoods and communities with value oriented stores are expected to remain healthy.

Current conditions:
Outlook:
Single-family rental

The single-family and built-to-rent sectors remain healthy and well-positioned. Fundamentals are strong, driven by solid demand and favorable affordability metrics compared to both the single-family for-purchase market and equivalent multifamily units. While rental growth has slowed compared to the previous year, this trend has been exacerbated in a few metros due to increased build-to-rent activity. Although lower interest rates could improve affordability in the for-purchase market, elevated home prices will likely limit a broader shift in the near term.

Current conditions:
Outlook:
Data centers

The data center sector remains extremely tight, with vacancy rates across major markets averaging under 2%. Rental growth in core markets is approaching 30% on a year-over-year basis, as new supply cannot keep pace with increasing demand. Debt capital remains available for existing assets, but high development costs have limited lending primarily to larger investment banks.

Current conditions:
Outlook:
Student housing

The student housing sector continues to perform well, with preleasing close to 90% through mid-year. Rent growth remains stable, and overall demand supports rental increases in the mid-single digits. While demographics continue to favor healthy performance, tailwinds may fade as key cohorts decline and enrollment rates in four-year institutions have flattened in recent years.

Current conditions:
Outlook:
Life sciences

The sector continues to face significant headwinds following its stellar performance during the pandemic. The lack of capital for start-ups has challenged occupancy amid a rapid pace of development in several metros. While well-capitalized biotech and life science companies continue to perform well and attract interest as tenants, the sector overall is struggling. Exacerbating these issues is the lack of hiring within life science occupations, partly due to insufficient venture capital funding. Although funding has improved from its lowest point, it remains well below its highs.

Current conditions:
Outlook:

Source: Principal Real Estate, Fall 2024.

For our detailed perspective on the conditions and outlook for each sector, please download the full U.S. Real estate sector report.

Real estate
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Risk considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Fixed-income investment options that invest in mortgage securities, such as commercial mortgage-backed securities, are subject to increased risk due to real estate exposure. Floating rate debt instruments are subject to credit risk, interest rate risk, and impaired collateral risk, which means that the value of the collateral used to secure a loan held by the fund could decline over the course of the loan. Credit risk refers to an issuer’s ability to make interest and principal payments when due.

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MM11889-07 | 10/2024 | 3910982-122025