2024 will be a defining year for commercial real estate (CRE) as the industry continues to transform to meet post-pandemic demands and a challenging economic market. Looking ahead, property owners and investors should expect the roller coaster of recent years to continue, opening the door to creative solutions and cost-saving measures. Below are the top commercial real estate trends to keep an eye on in the new year.
CRE loans are getting more expensive and harder to find
It has been difficult for interest rates to rise since March 2022, especially after relatively low interest rates throughout the 2010s and since the all-time lows immediately after the pandemic. The interest rate environment increases the challenge for commercial real estate investors, who typically need to refinance every few years.
The situation is further complicated by the fact that many banks have significantly tightened their commercial lending standards in recent months. Experts expect the conservative approach to lending to continue into 2024, meaning that in addition to paying higher interest rates, CRE investors will find it more difficult to obtain financing. means. As a result, commercial real estate sales volume has declined significantly, with properties valued at $1 million or more dropping 53% year-on-year in the first half of 2023.
However, as we move into the second quarter of 2024, we could see all of that change, assuming the following:
- Market liquidity remains strong, but it is highly dependent on office real estate trends and valuations.
- Interest rates are trending lower and may continue to do so until 2024
- Demographics continue to drive the need for more housing
Non-life insurance premiums rise due to rising construction costs
A combination of inflation, labor shortages, and rising material prices have led to historically high construction costs across the United States in recent years. When combined with other factors such as an increase in catastrophe claims, the impact on property and casualty insurance rates can be dramatic. Commercial real estate insurance saw an average premium increase of 17% in the third quarter of 2023, according to The Council of Insurance Agents & Brokers Market Index.
In addition to rising premiums, construction inflation can also cause gaps in coverage if policies are not updated to reflect current replacement costs. Construction inflation is expected to continue until 2024. Material prices will begin to stabilize, but labor shortages and local demand may offset savings.
Privatized student housing opportunity stands out in tough market
With average office vacancy rates continuing to hover around 15% across the U.S. and multifamily rent growth slowing significantly from the double-digit growth rates of recent years, privatized student housing is an investment in commercial real estate. making it an attractive option for homes. Historically, demand for student housing has remained relatively stable during economic downturns, and occupancy rates have remained stable during pandemics. Many campuses are currently experiencing enrollment growth, and housing demand is increasing along with it, especially at top research universities and schools in high-paying athletic conferences.
Limited supply will also make it more attractive to investors in the coming years. Rising interest rates limit financing for new construction, and some schools may have little space on which to build. As a result, schools have turned to private investors to take on the responsibility of upgrading and managing existing facilities. As a result, property owners are able to increase rents as supply becomes limited and upgraded. In particular, through the first half of 2023, rents for purpose-built student housing grew faster than rents for apartments.
New incentives expected to drive office-to-residential conversion
There is approximately 1 billion square feet of vacant office space in the United States, and competition for tenants is fierce. On the tenant side, pressure to increase property taxes is increasing as they consolidate space and choose higher quality properties to accommodate hybrid work strategies. As a result, commercial real estate owners and investors will be considering options to upgrade their office class or convert space to other uses that are more valuable than office or retail.
At this time, conversions can be difficult due to financing, zoning restrictions, and building regulations. But lawmakers believe there is an opportunity to address the lack of affordable apartment housing by encouraging the conversion of office space. For investors, multifamily housing continues to create profitable opportunities as they navigate economic and risk-related trends, especially when considering state budget gaps. As local governments look to multifamily housing as a new source of revenue, elected officials at the state and local level are developing incentives and tax breaks aimed at increasing office-to-residential conversion. ing. We expect this type of conversion to increase in the coming years as incentives are introduced.
Exploring cost segregation is still a smart way to reduce tax liability
A cost segregation study identifies building components that accelerate real estate depreciation deductions and shorten the depreciation period. This process includes engineering analysis and tax expertise to reclassify elements such as non-structural features into his 5-, 7-, or 15-year categories, resulting in early Significant tax savings will be realized.
All types of commercial real estate can receive tax benefits through a cost segregation study. Generally, property owners who construct, renovate, or acquire commercial properties benefit most from cost segregation, but companies that make building upgrades that typically cost more than $500,000 are good candidates. Evolving tax laws and compliance requirements make choosing a cost separation partner important.
CBIZ’s team of commercial real estate experts can help you optimize your strategy and explore opportunities in 2024. Connect with a member of our team and access more resources here.
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