The past year’s bumpy ride in CRE is far from over, but a new investment landscape emerges for the careful investor. You can thrive amid the chaos by capitalizing on 2024’s top commercial real estate trends.
The 2023 commercial real estate market faced no shortage of challenges. Relentless interest rate hikes, slowing rent growth, and rising vacancy rates across sectors hammered the commercial real estate market, reports the National Association of Realtors (NAR).
And then there was the banking turmoil, market volatility, record inflation, geopolitical issues, and an energy crisis, which kept constant fears of a recession on economists’ and real estate investors’ minds.
As macroeconomic volatility steered the economy into uncharted territory, U.S. commercial real estate investment volume fell by 54% year-over-year in Q3 to $82 billion, according to the CBRE.
Source: CBRE
And while the recent pause on rate hikes offered some relief to a struggling real estate market, delinquency rates are still edging up on commercial loans, reports the National Association of Realtors.
So will 2024 bring any relief to the commercial real estate market?
Sector leaders surveyed in Deloitte’s yearly CRE outlook widely share pessimistic expectations about revenue for the coming 12-18 months. PwC’s 2024 trend forecast showed similar sentiment.
Source: PwC
Respondents point to the cost of capital and capital availability as the weakest among weakening real estate fundamentals, and about half of respondents expect the cost of capital and capital availability to worsen through 2024.
That said, some bright spots in the CRE market will persist through 2024. In their 2023 Q4 outlook, global asset manager FS Investment mentions commercial property like multifamily, industrial, hotel, and retail.
Meanwhile, other commercial real estate market trends are emerging that may very well shape the future of CRE in America and beyond. In their respective 2024 CRE outlooks, both Deloitte and PwC expect a pivotal year where adapting to new realities is key to success and survival.
So what is the outlook for the commercial real estate market in 2024? And what are persisting pockets of opportunity and future-defining trends in commercial real estate that developers and CRE investors should look out for?
In this article, we’ll cover 7 major trends in commercial real estate:
Read on for a deep look into commercial real estate trends (2024).
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Heading into 2024, the question on real estate investors’ minds is, “Are the rate hikes over?”
The Federal Reserve is expected to signal one more interest rate hike and maintain the peak level in 2024 for a longer period than previously anticipated, according to economists surveyed by Bloomberg News.
This higher-for-longer approach to interest rates will likely continue putting pressure on the commercial real estate (CRE) market in several ways:
While the interest pressure sets the climate for commercial real estate trends (2024), positive sentiments do arise from the Fed’s higher-for-longer message.
Investors are eager to acquire new assets. PwC’s Emerging Trends Barometer for 2024 registered its highest “buy” rating since 2010.
Source: PwC
This heightened enthusiasm reflects recent and projected price declines, presenting a more favorable entry point for acquisitions following a decade of continuous appreciation.
Nearly half of survey respondents also expect cap rates to rise further, depressing values even more.
Yet sales transaction levels are expected to remain down, creating a wide bid-ask spread where buyers and sellers cannot agree on CRE valuation because the shortage of sales limits price clarity.
So is it a good time to invest in commercial real estate?
Facing the Fed’s soaring interest rates and forecasted economic slowdown, CRE investors are wise to exert caution and adapt their long-term strategies based on macroeconomics.
Continued inflated cost of capital and higher borrowing costs will likely continue to limit buying opportunities for investors without a war chest.
As banks report continued losses on CRE loans, and experts fear non-performing loans (NPLs) and delinquencies continue to rise, borrowers struggle to refinance their CRE loans against property values decline and high-interest costs, writes Reuters.
The nearly $900 billion in loans reported by PwC and set to mature over the next two years in America will, too, face difficulties in refinancing – a sure testimony to the need for caution among real estate investors as to what assets to purchase or keep, and which to shed.
Nonetheless, buying opportunities will likely arise for smart real estate investors with some cash at hand.
With caution and adaptation to a new economic reality marking a new direction for CRE firms and investors, expense mitigation is a top priority for most respondents of the aforementioned PwC report.
Talent and office space are top areas for cost reduction. To that same end, 61% of respondents also consider outsourcing certain operational capabilities.
Apart from streamlining processes, and adding agility and resilience to operations, gaining technical capabilities is a major reason for outsourcing.
Utilizing more property technology is sure to be one of the top commercial real estate trends in 2024. Simply put, proptech can revolutionize cost management and operational efficiency.
Gone are the days of having to remember to manually send rent statements or payment reminders.
Proptech automation allows property owners and managers to streamline processes like rent collection, and improve productivity through automation while reducing the need for manual, offline tasks – saving time and resources.
Investing in AI-powered proptech can also provide real estate and property developers with better data and insights, which can help to inform decision-making and identify new opportunities for cost savings.
But utilizing technology to enhance property management goes further than improving operational efficiency. As JPMorgan reports, it’s a potential game-changer.
Through the use of AI, commercial real estate owners can revolutionize the way they operate their property. Smart buildings can benefit owners, operators, and occupants in numerous ways, including reducing energy consumption and cost, and enhancing security.
With many firms and CRE players having postponed investment in technology, catching up with technical debt and harnessing AI’s potential will be one of 2024’s commercial real estate industry trends.
Powering analytic tools and smart buildings, AI is looking to reshape the real estate sector – but not just through proptech.
Without a doubt one of the top commercial real estate trends in 2024, AI can do much more than provide the artificial brains behind CRE operations. The artificial intelligence industry also has a growing need for data centers and specialized skill sets, both of which provide opportunities in CRE.
As investment management firm JLL writes, the massive data processing and storage needs for AI are fueling the growth of data center development. The number of hyperscale sites in development is expected to double by 2024.
The demand for data center space is so great that 70% of data centers under construction are pre-leased up to 36 months in advance of construction completion, reports the CBRE.
The Wall Street Journal, too, reports that AI is driving the growth of a new market for data centers that are specifically designed to handle compute-intensive AI applications.
While some established cloud vendors are retrofitting existing data centers with advanced chips and other upgrades to meet the demand for AI software, upstart builders are developing new facilities from scratch to cater to this market.
This commercial real estate industry trend is expected to continue as companies continue to seek ways to leverage AI to improve their operations.
The need for specialized skill sets is driving the establishment of AI companies and investors in major technology hubs and near top academic institutions, JLL forecasts. This trend is attracting investors and driving new demand for real estate in these markets.
But it’s not just the established tech hubs that attract real estate investments. CNBC reports that the White House has designated 31 technology hubs across 32 states to improve American competitiveness in the technology sector.
The White House release noted that “for too long, economic growth and opportunity have clustered in a few cities on the coasts,” adding that the designations reflect the diversity of America and will make these regional hubs more attractive to private investment and job creation.
Thus, commercial real estate investors will find opportunities across America and in less competitive spaces than the Silicon Valleys of the tech world.
Some of the positive trends in commercial real estate from 2023 are likely to continue, presenting opportunities for good returns in a stagnating market. These property types include retail, industry, and multifamily.
Retail availability has hit record lows. The National Association of Realtors reports that the CRE retail sector has further decreased its vacancy rate to a 10-year low of 4.1% in September 2023, remaining the lowest among all CRE asset classes.
Despite several prominent retailers filing for bankruptcy over the past year, 2024 is looking to show healthy demand, and landlords remain optimistic they can still quickly fill vacancies in retail properties and push rents higher.
However, new retail development is still structurally restrained due to limited new construction projects and demolitions from widespread store closures during the late 2010s, per Deloitte’s 2024 CRE outlook.
REjournals, a Chicago retail publication, reports that experiential retail, such as high-tech bowling alleys, is booming in popularity – possibly presenting another 2024 trend that real estate investors can capitalize on.
Retail isn’t the only property type benefiting from increased consumer spending. As reported in Deloitte’s 2024 outlook, industrial property is in demand too.
Spending on consumer goods during the pandemic pushed demand for warehousing and manufacturing space to new heights.
Boosted by growing e-commerce and third-party logistics providers, along with investments in reshoring initiatives to bolster stretched supply chains and domestic manufacturing, sustained demand for industrial spaces still shows high competition for existing space.
With mortgage rates inaccessibly high, the multifamily sector is experiencing a renewed surge in demand for apartments following a year of slowing down.
The NAR reports that, over the past year, net absorption and construction of units in the multifamily sector surged by 33% and 17%, respectively.
However, challenges like overbuilding have led to a 7% vacancy rate and minimal rent growth of 0.8%.
Despite this, the sector is expected to maintain strength due to positive demographic trends and a strong job market supporting household formation.
The emergence of hybrid work models is one of the key trends in commercial real estate that investors should take note of.
PwC’s trend report underlines that the shift to remote work might be the single most important trend for property market dynamics in generations, with far-reaching impacts on our lives and property markets.
Deloitte’s 2024 outlook reports that, on average, US office space utilization has steadied at just under 50% of pre-pandemic levels. In other words, the office sector will not be returning to pre-pandemic status, and CRE will need to adapt to this new way of working.
Reflecting this major trend, the U.S. office market continued into uncharted waters as net absorption remained negative, and vacancy in office properties hit a new record high.
Source: Colliers
Investment management firm Colliers observed that the US office vacancy rate stands at 16.7%. Moreover, the volume of office space currently under construction in America has continued its decline, now standing at 79.2 million square feet, 51% below the peak of Q3 2020.
The downtown Central Business Districts (CBD) are hit disproportionally, further indicating workers’ reluctance to leave their home area for an office job.
However, some areas continue to show high demand for office properties – like New York and the San Francisco Bay Area, where 10 million and 7.7 square feet of office building construction is underway.
As hybrid work models take hold, office owners and investors should re-evaluate underperforming assets. Options include repurposing buildings through adaptive reuse or conversions to meet demand for higher-quality, sustainable spaces.
For properties where upgrades are not financially viable, demolition may be necessary to right-size supply.
The office sector is undergoing a structural realignment, and astute investors will stay ahead of the curve by strategically repositioning portfolios to match evolving demand in a hybrid world.
Converting workspaces and other property types into homes may not always be a suitable solution to recover lost investments, especially if the demand for affordable rental properties is overwhelmingly low.
Indeed, repurposing a property often is not a cost-effective solution. Instead of repurposing, commercial real estate investors and developers can create demand for CRE property by learning what people need or providing that product or service.
A possible demand-driving commercial real estate trend in 2024, news outlet Forbes highlights how CRE can be reinvented to recover lost profits by providing amenities.
Amenities play a crucial role in driving leasing decisions, whether it's for commercial real estate, hotels, or apartments. The right amenities can attract and retain tenants, while the lack of desirable amenities can be a deal-breaker.
Forbes lists some of the top amenities employees desire, including on-site food and retail stores, wellness services, communal space, security and controlled access, high-quality internet, and convenient commute.
A final but crucial commercial real estate trend in 2024 and beyond is sustainability. Concerning this, Deloitte’s managing director John D’Angelo emphasizes a worrying finding.
In Deloitte’s 2024 CRE survey, 60 percent of respondents said they do not have the data, processes, and internal controls necessary to comply with sustainability-related regulations and expect it will take significant effort to reach compliance.
Environmental, social, and governance (ESG) metrics are expected to be incorporated into corporate disclosures at levels comparable to financial reporting due to the evolving nature of sustainability regulations worldwide.
To comply with ESG standards and operate more sustainably in the commercial real estate sector, Deloitte advises investors and developers to:
Among the commercial real estate trends (2024), sustainability-related compliance is a trend that many real estate firms aren’t ready for. Gaining a headstart by ensuring compliance when investing or developing could prove a big market advantage going into 2024.
As a new commercial real estate landscape emerges from the pandemic and shaky economic times, informed CRE players head into 2024 with cautious optimism.
Yes, more economic uncertainty, tightening credit, and tougher ESG regulations lie ahead – but opportunities remain for strategic investors.
Proptech, AI, and amenities can help owners enhance efficiency, lower costs, and attract tenants. Resilient asset classes like industrial spaces, multifamily, and retail properties appear well-positioned.
And astute investors will get ahead of structural shifts, like hybrid work, by repurposing obsolete office assets or choosing location strategically.
Finally, adapting to evolving ESG regulations requires effort but will bring strategic advantages. Firms proactive on sustainability metrics and climate risk planning can gain a competitive edge.
In utilizing 2024's commercial real estate market trends to overcome the challenges ahead, creativity and agility will differentiate success from struggle.
Investors must be open-minded to reinventing properties and business models. Though the road ahead is rocky, those able to nimbly respond to changing realities will thrive.
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