Commercial Real Estate Market Analysis 2024: 5 Factors Set to Move The Market

2024 will be a make-or-break year for CRE property developers. Get ahead of the market by leveraging the 5 factors laid out in this commercial real estate market analysis.

After a rocky few years in the commercial real estate market, the macroeconomic dust is just starting to settle in the CRE landscape. This is a period when smart property developers should work out the factors that define the current state of the CRE market, as well as those that will most likely move the market in 2024.

With the debilitating lockdowns of the COVID-19 pandemic behind us, the macroeconomic landscape presented the commercial real estate sector with challenges to boot.

Tightening monetary policy, slowing rent growth, and rising vacancy rates across sectors still plagued the CRE market at the end of 2023, reports the National Association of Realtors (NAR).

CRE developers looking for a light at the end of the tunnel will have to look beyond 2024 for stronger market metrics. Investment firm CBRE forecasts does not expect GDP growth to pick up until the end of 2024, after a nearly four-year downtrend.

Until then, economists expect a moderate recession, a mild increase in unemployment, and higher interest rates weighing on growth – though perhaps no more rate hikes.

Source: CBRE

Reflecting struggling GDP fundamentals and capital markets, the CBRE reports that US commercial real estate investment volume fell by 54% in Q3 of 2023 compared to the previous year.

Heading into 2024, industry leaders interviewed by Deloitte shared pessimistic expectations about revenue for the coming 12-18 months and stressed the importance of repositioning themselves for the coming years.

Similarly, investors in PwC’s 2024 trend forecast have low return expectations for 2024 while foreseeing a decrease in investor return in the next 5 years.

The report concludes that many of the factors that plagued 2023 are also key in 2024, as they are in this commercial real estate market analysis.

commercial real estate market analysis 2024

Source: PwC

It seems then that 2024 is a pivotal year for commercial property developers to align with the factors that are set to move the markets in 2024 and beyond.

In this commercial real estate market analysis for 2024, we report on the following 5 key factors:

Factor 1: Economy shows resilience amid mild inflation

Factor 2: Inflation uncertainty keeps capital markets closed

Factor 3: Debt maturity wall looms

Factor 4: Structural changes needed in an underused office sector

Factor 5: Demand for data centers skyrockets

Read on for market insights in our in-depth commercial real estate market analysis report.

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Factor 1: Economy shows resilience amid mild inflation

America is facing a post-pandemic era of higher interest rates and slower economic growth, yet the US economy is showing remarkable resilience.

The nation’s economy expanded at a robust 5.2% annual rate from July through September as American consumers defied inflation, rising interest rates, and widespread forecasts of a recession to spend at a brisk pace, as reported by Associated Press.

Source: AP

Inflation has slowed to an annual rate of 3.7% down from a four-decade high of 9.1% in June 2022, PBS reports. At the same time, steady growth and hiring have forestalled a recession, which was widely predicted at the end of last year.

For real estate investment firm Clarion Partners, this is a cause for cautious optimism about the economic outlook for some property types in the commercial real estate industry, such as multifamily properties, which have experienced high rent growth and occupancy rates.

Due to strong consumer demand, retail CRE is performing remarkably well. Retail performance is a function of more sanguine consumer sentiment, which was weak in the first half of the year but began to recover in the second half as inflation eased. Publisher US News reports that store openings have outpaced store closings in 2023.

Riding the same wave of consumer spending, industrial and e-commerce are in demand too, the previously mentioned Deloitte report states, with warehouses and distribution centers in demand for the supply chain.

Yet this commercial real estate market analysis cautions CRE investors looking to profit off these market trends.

The robust growth and consumer optimism may prove to be a high-water mark for the economy before a steady slowdown begins in the current October-December quarter and extends into 2024 due to sustained rate hikes.

Factor 2: Inflation uncertainty keeps capital markets closed

As Fed Chair Powell addressed high consumer spending in a November speech, he remarked that the path ahead for inflation remains highly uncertain, and the Fed needs to keep interest rates at a level that is sufficiently restrictive to return inflation to 2%.

"It is likely that restoring price stability will require holding policy at a restrictive level for some time,” said Powell. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done."

commercial real estate market analysis 2023

Higher-for-longer interest rates mean capital markets remain inaccessible, as shown by the decline in investment volume. Given the current trajectory, borrowing costs will remain elevated in 2024, continuing to put pressure on commercial real estate deals and new developments.

The problem is being exacerbated by banks tightening their lending standards or refusing to make CRE loans at all.

This is because federally regulated banks hold virtually all of their reserves in U.S. government bonds, and when rates go up, the value of bonds goes down, leading banks to be very conservative in making loans.

Not only do CRE loans cost more today, but they are also harder to find. Until a clear path forms with decreasing interest rates and a soft landing in sight, commercial developers will face difficulty with capital market access.

Factor 3: Debt maturity wall looms

While higher mortgage rates are no good for CRE investors looking for a loan, they can be devastating for property developers who borrowed heavily and need to refinance.

With debt refinancing still facing major hurdles for loans coming due, defaults may increase as cash flows dry up and properties struggle to roll over loans at sufficiently low rates.

So far a cascade of delinquencies has been staved off, though the overall CMBS delinquency rate reported by CRE analyst Trepp moved up modestly in the second quarter of 2030 before rising 14 basis points to 4.58% percent in November.

That is the second-highest reading since the end of the COVID-19 pandemic and a foreboding of 2024.

Source: Trepp

Worryingly, the percentages in these market reports don’t include delinquent loans that are past their maturity date but are current in interest payments. A significant number of these borrowers are finalizing extension options.  

However, there is a growing trend among borrowers choosing to forego these extension options.

When interviewed by publisher Commercial Property Executive, Randy Blankstein, the president of real estate firm The Boulder Group, noted how “2023 was a light loan maturity year and a lot of people have pushed that problem down the road. Next year, however, they will have to address it.”

Blankstein fears that over the next year, borrowers holding imminently maturing CMBS and other loans will face defaults when they cannot find willing lenders.

commercial real estate market analysis 2024

As delinquencies rise, distressed asset sales could accordingly accelerate. However, patient capital willing to stomach risk stands ready to take advantage of forced sales by overleveraged owners.

As higher rates drive further value declines, opportunistic investors see investment opportunities to acquire properties at a more favorable price.

Factor 4: Structural changes needed in an underused office sector

Leading in the delinquency rates at 6% are office spaces. A key factor in this market report of the CRE landscape, a cascade of defaults and sell-offs in the office sector could have dire implications for CRE and the US economy.

In an article for Forbes Business Council, CEO of Caleb Richter discusses the potential for a commercial real estate crash in the United States due to a cascading effect in an office sector crippled by office vacancy and low property valuation.

“These commercial structures aren’t merely concrete and glass: They signify value for property owners and their lenders; value, that is, if they are utilized as intended. Should they become redundant, a significant portion of the economy stands at risk.”

On average, US office space utilization has steadied at just under 50% of pre-pandemic levels, reports Deloitte’s 2024 outlook. Except in districts such as downtown New York, office buildings will not be seeing occupancies return to pre-pandemic status.

If the office sector loses half its value, the ensuing domino effect of foreclosures, defaults, sell-offs, and bankruptcies would be disastrous to the CRE market and the American economy, given trade association Nareit’s 2021 estimate that the office market hovers around $3.2 trillion in value.

Office workers in the US, Europe, and around the globe have realized the feasibility of working remotely, leading to a reduced need for office space.

Additionally, the bargaining power has shifted towards younger employees due to shifting demographics as boomers retire, allowing them to negotiate better working conditions, often from the comfort of their homes.

This leaves office spaces open to be reutilized for new purposes, perhaps by adding amenities or converting them completely to retail spaces. It's a profound restructuring opportunity for investors.

commercial real estate market analysis 2024

So what is the outlook for office space in 2024? The potential exists for a domino effect to unfold, but the office sector will likely undergo a structural realignment, presenting astute CRE investors the chance to stay ahead of the curve by evaluating asset management to match with the evolving uses of old office spaces.

Factor 5: Demand for data centers skyrockets

This commercial real estate market analysis ends with a silver lining, as one CRE sector manages to escape the volatility of the broader market.

Recent AI advancements saw the emerging commercialization of the technology. As a result, demand for data centers is skyrocketing. Similarly, digitalization and continued rollout of the 5G network create a strong demand for server farms and cellular towers.

The United States data center market has experienced significant growth in recent years and is expected to continue expanding at a considerable rate. The United States already had 2,701 data centers in 2022, the largest number in the world, followed by Germany, Britain, and China, reports the NY Times.

According to consulting firm Mordor Intelligence, the US Data Center Market size is projected to grow from USD 18.10 billion in 2023 to USD 28.46 billion by 2028, at a CAGR of 9.47% during the forecast period (2023-2028).

This growth will require a tremendous amount of real estate in 2024 and beyond. So much so that data center developers are expanding their horizons when choosing construction sites, publisher Network World reports.

As Northern Virginia, the largest data hub in the world, becomes saturated, new locations, such as Atlanta, Columbus, Las Vegas, Salt Lake City, or Denver attract commercial developers.

Source: Data Center Map

Other construction constraints lead to increased costs, including labor, materials shortages, and high energy costs in particular.

Luckily, financing is plentily available to the data center industry, says Julie Brewer, who is SVP at data center developer EdgeCore.

“Data centers drove a solid portion of debt fundraising activity in the first half of 2023, and the pace has not slowed. [...] As the industry has matured, lenders and investors alike have developed a stronger understanding of data centers,” says Brewer. “The industry has robust fundamentals that attract capital—high credit tenants, long-term leases, real assets that are usable across a wide base of tenants, and a tenant base that often invests significant amounts of their own capital in the data centers.”

commercial real estate market analysis 2024

Despite the higher cost investing climate, the debt markets remain open to the data center industry, which appears to become 2024’s winning sector in the commercial real estate industry and one of the few sectors benefiting from the growth in infrastructure capital availability.

Implications & Positioning for 2024

The implications in this commercial real estate market analysis report are clear: The stagnating fundamentals of the CRE market mean 2024 will present a make-or-break year for commercial developers.

Yet opportunities exist for those prudent in property management and able to accurately forecast paradigm shifts in property demand.

Developers must brace operations for economic uncertainty while seeking assets resistant to downturns - like industrial and multifamily in strong consumer sectors. At the same time, sustained interest rates and ensuing delinquencies offer chances to capture undervalued property in office, retail, and other CRE markets.

And one need not look further than robust data center growth to find CRE's silver lining. The sector's sustained expansion brings a rare chance to capitalize on structural changes benefitting digital infrastructure.

2024's commercial real estate landscape demands resilience – creatively optimizing portfolios, not battening down the hatches. With interest rates set to stabilize and the Fed closing in on a soft landing of 2% inflation, the coming years will reward property developers who evolve their strategies today.

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