It’s a safe bet that some events will ignite a much-needed recovery in the commercial real estate industry in 2024. There are also signs of various CRE sectors undergoing a transition that will help properties rebound from challenges in recent years.
Cooling inflation, expectations of lower interest rates, and some banks easing post-pandemic lending restrictions should set the stage for the start of a recovery.
Another market reality is the wave of debt loan maturities on commercial properties — roughly $1.9 trillion in real estate loan maturities coming due through 2027. In the fall of 2023, federal regulatory agencies encouraged lenders to work with creditworthy borrowers facing financial challenges. As a result, $13.6 billion across 441 loans were modified in 2023. Short-term loan extensions were the most common type modification issued. As we head into 2024, it’s likely that the number of refinancing transactions will increase as rates become more favorable.
Interest Rates Projected to Head Lower in ‘24
The Fed held interest rates steady during a mid-December meeting, and published reports said that some Federal Open Market Committee members gave indications of being in favor of rate cuts. Whether the Fed reverses course on interest rates earlier or later in the year, it’s nearly unanimous that it will happen.
Among the chief reasons is cooling inflationary pressures. While the current inflation rate is still above the Fed’s 2% target, inflation has followed a downward trajectory in recent months, seemingly enough to convince the central bank to lower rates to avoid deeper economic troubles. And the 2024 presidential race seems likely to add pressure to lower interest rates.
Deloitte’s 2024 Global Real Estate Outlook Survey acknowledged that although the real estate industry still faces challenges next year, its 2024 forecast raises hopes that the market has found a bottom and is on the upswing. “The coming year is expected to be pivotal in real estate firm’s ability to recover and build up,” the report said.
The new year also is expected to continue to show an industry in transition, as some asset classes are expected to show improvement as a result of internal and external forces causing structural change.
The office market has been hard hit during and after the pandemic primarily due to the current interest-rate environment impacting borrowing costs and many businesses adopting a hybrid work model.
But the entire office market should not be tarred with the same brush. There is still strong demand for high-quality, amenity-rich Class A office buildings, particularly in high-growth regions across the country. Many Class B and Class C office buildings will be renovated to offer more flexible space and amenities or converted to multi-family and mixed uses.
Additionally, many office buildings are following the hybrid-work model. According to the Deloitte report, industry estimates reveal that new construction design accommodating hybrid-work strategies has absorbed 100 million square feet of unused space.
After years of undergoing weakened demand for brick-and-mortar retail stores, this sector is employing new growth strategies. For example, malls and shopping centers are increasingly offering a wider mix of entertainment and dining offerings to create unique experiences for shoppers. Many physical retail establishments are also utilizing innovative strategies to bring more business through their doors.
The transformation of the retail sector appears to be showing some success. According to a Coresight Research report, U.S. store openings outpaced store closings by 1,500 stores in 2022 and about 1,000 stores in 2023.
During the pandemic, the hotel industry suffered from sharp drops in business and leisure travel. Today, the industry has rebounded. An American Hotel and Lodging Association report said leisure travel for hotels was expected to surpass pre-pandemic levels by 14% in 2023. Demand for hotel rooms for leisure travelers is expected to continue this upward trend for 2024 based on positive economic factors, while business travel for hotels is expected to strengthen more in late 2024 and 2025.
Brand-new hotels also will be popping up in 2024. According to a recent Forbes article, hundreds of new hotels are expected to open in the upcoming year, ranging from “smaller boutiques to lavish resorts” in the U.S. and abroad.
The healthcare sector is expected to continue its strong trajectory in 2024. An aging baby-boomer population is viewed as a key growth driver for this asset class.
Healthcare construction is predicted to post a 2.6% gain in 2024, which is associated with healthcare facilities in higher-density populated areas, according to a buildingbetterhalthcare.com report.
According to a 2023 Health Facilities Management survey, 45% of the respondents expected construction budgets to remain stable while 38% predicted an increase in budgets. Medical office buildings posted a strong occupancy rate of nearly 93% in the second quarter of 2023 due to increased demand for outpatient services. This MOB trend is expected to continue in 2024.
The U.S. industrial building sector remains one of the brightest spots in commercial properties. While torrid demand for industrial properties slowed in 2023 from previous years, it’s coming off of record levels. This sector is projected to remain strong due to e-commerce and a trend of near-shoring or re-shoring of manufacturing facilities, among other factors.
J.P. Morgan Chase issued a report in December that said its outlook for the industrial sector was unchanged from six months ago, stating “although industrial is beginning to show signs of softening, the sector’s long-term growth remains positive.”
Improving Conditions to Spur CRE Recovery
Overall, the CRE industry is poised for a recovery in 2024 amid signs of improving economic conditions despite some lingering headwinds. It also marks the continuation of an industry undergoing a transformation that will strengthen its resilience and adaptability in the years ahead.