The commercial real estate market is still reeling from the aftermath of the pandemic, and 2023 was a particularly bad year for the sector. Last fall, Julie Whelan, CBRE’s global head of occupier research, said: luck It’s no secret how bad office vacancy rates are, with the vacancy rate at around 18%, the highest it’s been in 30 years. At the same time, there was a huge shortage in the supply of multifamily housing. Could this critical sector, so critical to the recovery of downtown business districts, face even more favorable conditions in 2024? The outlook for the Magic 8 Ball is cloudy.
The National Association of Realtors (NAR) said in a report released Thursday that inflation and mortgage rates are “the twin pillars of economic conditions and, by extension, trends in the commercial real estate sector.” There is optimism here, with inflation starting at 6.4% in January 2023 and falling to 3.1% by the end of the year, while mortgage rates peaked at a whopping 8% in October and have since only It declined to . But even though the current 30-year fixed mortgage rate has dropped to 6.76%, that’s not enough for troubled commercial real estate.
“The overall outlook for commercial real estate in 2024 is muted,” said Ermengardo Jabir, senior economist at Moody’s Analytics. luck. “There will continue to be some sort of realignment across all sectors.” This includes office, multifamily, industrial and retail real estate. And one thing is clear: “The Office will continue to face her greatest burden in 2024,” she added.
Office sector outlook
During and after the pandemic, many companies reduced their office footprint and opted for more remote or hybrid work options. Neiman Marcus Group, for example, has downsized significantly, with only about 20% of its internal office space available due to the pandemic, and its Dallas headquarters having just about 100,000 square feet of office space. Additionally, coworking office space was hit hard by WeWork’s $18 billion bankruptcy in late 2023, leading to dozens of leases being terminated across the country, including 35 in New York City alone.
Meanwhile, NAR reported that the office sector was “the hardest-hit sector in commercial real estate, suffering the largest losses in 2023,” and “unfortunately” 2024 will see the largest losses. It added that it was expected to be another difficult year for the sector.
In fact, demand for offices is so low that a 2023 report from Cushman & Wakefield estimates there could be as much as 1 billion square feet of unused office space in the U.S. by the end of the decade. It is said that there is. This is almost 1.5 times the number of office vacancies at the end of 2019.
“Even with stricter return-to-office mandates set to come into force in 2024, we expect companies to further reduce office space and vacancy rates to rise slightly,” Jabir said. Ta. Moody’s Analytics even predicts that office vacancy rates will reach an all-time high in 2024.
But for companies that value face-to-face interactions, experts agree that quality will become a more important issue in 2024. This means there will be more competition for Class A office space as opposed to Class B or Class C properties.
This “space oversupply and watershed due to high demand for Class A space is further exacerbated by high levels of debt maturing amid plummeting office valuations and rising interest rates,” the Northeast on commercial real estate. said Marisha Clinton, senior director of regional research. Securities company Savills speaks. luck.
“Many landlords are unable to renegotiate terms with their lenders, which can lead to loss of the building,” she says. “This has caused investors to become cautious and focus on distressed assets rather than aggressively seeking value-add opportunities.”
But these unused Class B and Class C office buildings could eventually be converted into residential land, Jabir said. “As the office woes continue, more companies are reaching for a flight to quality, making older and less desirable Class B/C space obsolete,” she says. “This creates an opportunity to transform office space. [central business districts] It can also be applied to other applications such as apartments and data centers, and while it is not a panacea, it can breathe new life into some properties. ”
But other real estate experts and investors are less optimistic that such a shift will occur on a large scale. That’s because in many cases it can end up being too expensive or actually take longer than new construction. Additionally, only about 10% of office buildings are suitable for office-to-residential conversion projects, according to Stein Van Neuerburg, a professor of real estate and finance at Columbia Business School.
“Not all transformation projects make economic sense,” he warned in an October 2023 Goldman Sachs report. He also calls the demise of the office sector a “slow-motion train wreck.”
Outlook for the multifamily housing sector
The National Multifamily Housing Council estimates that the United States will need to build an additional 4.3 million multifamily units by 2035 to meet demand for rental housing, including 4.3 million more multifamily units built after the 2008 financial crisis. The project includes 600,000 homes to fill the gap caused by the construction shortage. Current estimates are that nearly 730,000 units are under construction, according to an August 2023 Fannie Mae report.
Demand for these properties is so high that rental prices have increased over the past few years. Furthermore, due to the lack of affordable properties, renters have no “choice” other than to look for Class B or Class C apartments (usually older apartments with lower rents), which can lead to “housing affordability”. It just puts more pressure on the country,” Jabir said. However, he predicts that multifamily price corrections will continue this year.
However, certain areas, such as the Mountain and Sunbelt markets, are seeing an uptick in multifamily construction, said Jason Sorens, an economist at the National Bureau of Economic Research. luck, Based on building permit data, this is expected to continue this year.
“But that means value and rent growth will slow or even fall, and vacancy rates will rise,” he says. “However, in the Northeast and Pacific Coast, where markets are less established, rents are likely to continue their upward trajectory.”
Outlook for the retail sector
Despite the rise of e-commerce, Jabir predicts that “retail will emerge as the dominant player in 2024, oddly enough.”
Her reasoning is that retail has already faced a major decline over the past two decades, and that “vacancy rates have remained the same and rents in neighborhood and community shopping centers have experienced modest positive growth.” The company is in a position to maintain more stable performance.
NAR’s report also shows that rent growth in the retail sector is slowing and vacancy rates remain at a 10-year low of 4.1%. However, success depends on the type of retail space. NAR predicts that malls will continue to underperform, but that neighborhoods and downtown centers will have “the highest rent growth of any type of retail space in 2024, with stable performance.” It is expected that
“Consumer spending remains resilient, and despite significant speculative development, we expect a slowdown in construction due to rising interest rates to avoid excessive vacancy rates,” Clinton said. “The sector’s solid long-term fundamentals and minimal distress are attracting investors, presenting a stronger position heading into 2024.”