As of September 30, 2022, national multifamily market vacancy rates increased to 5.5%. Our market areas reflected the following apartment vacancy levels as of September 2022: Springfield, Missouri at 2.7%, St. Louis at 8.8%, Kansas City at 5.7%, Minneapolis at 6.3%, Tulsa, Oklahoma at 6.5%, Dallas-Fort Worth at 7.2 %, Chicago at 4.9%, Atlanta at 7.7%, Phoenix at 8.4%, Denver at 6.6% and Charlotte, North Carolina at 7.3%. Five of our market areas, Atlanta, Dallas-Fort Worth, Denver, Minneapolis, and Phoenix, were in the top ten metropolitan areas for current construction and 12-month deliveries to market.
Demand for office space is weakening once again, with net absorption falling back into negative territory and the pool of available sublease space expanding. Uncertainty remains the prevailing theme, as firms continue to debate workplace schedules and assess real estate requirements. With the additional risk of recession rising amid high inflation and aggressive Fed policy, a full recovery in the office market is likely a longer-term proposition.
Rent growth as of September 30, 2022 is now positive on a year-over-year basis in most major markets, although it remains modest in many. The current oversupply of available space, both existing and forthcoming, points to downside risk.
Multiple factors could weigh on both activity and pricing in the office market going forward, including higher interest rates and subsequent cost of debt, slowing economic growth, and continued shift to remote and hybrid workplace schedules.
As of September 30, 2022, national office vacancy rates remained about the same at 12.5% compared to June 30, 2022, while our market areas reflected the following vacancy levels at September 30, 2022: Springfield, Missouri at 4.9%, St. Louis at 10.7%, Kansas City at 10%, Minneapolis at 10.5%, Tulsa, Oklahoma at 12.1%, Dallas-Fort Worth at 17.2%, Chicago at 14.9%, Atlanta at 14.3%, Denver at 14.9%, Phoenix at 14.9% and Charlotte, North Carolina at 11.2%.
The retail sector remains in expansion mode despite growing headwinds from inflation and rising interest rates. Overall, consumers continue to spend at a very healthy clip, though the increased cost of necessities such as food, gas, and housing are starting to weigh on the real growth of spending for non-essential goods. Leasing activity for smaller spaces is being overwhelmingly driven by growth in quick service restaurants and cellular service retailers. While demand for retail space is on the rise, construction activity continues to fall. Most recent construction activity has consisted of single-tenant build-to-suits or smaller ground floor spaces in mixed-use developments. Due to growing demand and minimal new supply, vacancy rates declined across most retail segments in the third quarter of 2022. While rents increased at 4.2% over the most recent 12-month period, inflation expectations will likely restrain the real rate of rental growth and keep it in line with or slightly below the average growth rate seen during the five years preceding the pandemic.
During the third quarter of 2022, national retail vacancy rates remained level at 4.4% while our market areas reflected the following vacancy levels: Springfield, Missouri at 3.1%, St. Louis at 5.7%, Kansas City at 4.3%, Minneapolis at 3.3%, Tulsa, Oklahoma at 3.2%, Dallas-Fort Worth at 4.8%, Chicago at 5.8%, Atlanta at 4.0%, Phoenix at 5.3%, Denver at 4.3%, and Charlotte, North Carolina at 3.7 %.
The U.S. has been in the midst of a historic boom in household spending on retail goods (both online and in store), all of which need to be stored in logistics properties across the country before reaching the end consumer. U.S. industrial leasing has held up remarkably well despite rising interest rates and stubbornly high inflation rates eroding household purchasing power, which has resulted in a decline in consumer goods spending from high levels recorded during early 2021 when the final round of stimulus checks were issued. Even when adjusted for recent inflation, monthly goods spending still continues at the latter part of 2022, to come in about 6% higher than levels that likely would have been recorded, had spending not spiked in recent years and simply continued to rise in line with its pre-pandemic growth trend.
Risks that industrial leasing will moderate back down toward levels that are more normal in 2023 are accumulating. Leading indicators of U.S. economic growth including housing permitting, the yield curve, and consumer expectations for business conditions have been flashing warning signs since the Federal Reserve began raising interest rates during early 2022.
Amazon, which accounted for 15%-20% of North American industrial absorption during 2020–21 by CoStar estimates, has clearly pumped the brakes on its distribution network expansion, canceling a range of development projects and even putting more than 6 million SF worth of existing distribution centers back on the market, either through sublease or by letting leases expire. So far, Amazon has disproportionately shed its smaller, older distribution space in locations where the firm has recently leased larger, more modern distribution centers nearby.
U.S. industrial rent growth at 11.4% year over year continues to accelerate as the slowing economy has yet to move the retail industrial space market in tenants' favor.
