2024 is shaping up to be a pivotal year for commercial real estate. A lot of CRE debt is coming due, interest rates are set to fall, new tech is emerging, and the industry is ripe for change.

Overview of the commercial real estate market in 2024

Overall, commercial real estate sales volume is down. From Q2 2023 to Q2 2024, transactions of major property types fell 9.4% to $40.1 billion. Meanwhile, aggregate transaction volume over H1 2024 totaled $75.3 billion, down 11.9% versus H1 2023 and 16.8% versus H2 2023.

Commercial real estate values were down 7% in May 2024 compared to a year prior, led by a 14% decline in office values.

At the same time, $929 billion in CRE debt is coming due this year. That’s a 28% increase from the $729 billion that matured in 2023 and 20% of the total outstanding commercial real estate debt ($4.7 trillion). Now that interest rates have risen sharply since most of these loans originated, many property owners may struggle to refinance.

However, Fed chair Jerome Powell recently indicated rate cuts are imminent, which could provide some relief to distressed landlords.

For now, CRE loan defaults are rising, with the delinquency rate increasing from 1.69% in Q4 2023 to 1.83% in Q1 2024. In addition, commercial real estate loan originations were down 2% year-over-year in Q1 2024, though the decline has started to flatten and may have bottomed.

Sector-specific insights with CRE trends

To understand commercial real estate trends more deeply, it helps to examine its main sectors:

1. Office spaces

It’s no secret that the office sector is struggling. Ever since the COVID-19 pandemic normalized remote work, demand for office space has dropped, leading to increased vacancies. In Q2 2024, the office vacancy rate hit a record 20.1%, the highest level since at least 1979.

That said, new offices in prime locations with great amenities (aka Class A offices) have largely avoided the downturn by attracting tenants seeking quality spaces to work.

2. Retail real estate

Retail space is making a comeback after a pandemic downturn. In Q2 2024, the net absorption rate for retail space jumped 75.4% quarter-over-quarter to 7.7 million square feet. Prime space is leasing out quickly, with average months to lease dropping to a new low of 8.5 months.

According to JLL, there is growing confidence that retail capital market transactions will stabilize in the second half of 2024, leading to increased investment activity.

3. Industrial & logistics

In Q2 2024, industrial real estate performed well overall. Net demand climbed, and asking rent grew to $9.97 per square foot. Although vacancy rates edged higher to 6.1%, the increase was the lowest quarterly rise since Q1 2023 and is mostly attributable to new supply coming online.

Driven by advances in AI, data centers are leading the industrial sector with a record-low 3% vacancy rate and a market that’s doubled in size in the last four years.

4. Multifamily housing

440,000 new multifamily units are expected to hit the commercial real estate market in 2024 with over 900,000 currently under construction. This will put downward pressure on occupancy rates and decelerate rent growth in the short term.

At the same time, rising interest rates and building costs have led to a drop in multifamily construction starts. CBRE expects them to fall 45% in 2024 from their pre-pandemic average and 70% from their 2022 peak, paving the way for new deliveries to be cut in half by 2026.

Economic and market drivers

Consider the following economic and market factors driving all commercial real estate trends:

1. Interest rates and inflation

Ever since U.S. inflation rates peaked at 9.1% in June 2022 due to low interest rates (designed to stimulate the economy during the COVID-19 pandemic), the Federal Reserve has been on a mission to bring inflation down to its target 2% rate by aggressively hiking its key interest rate.

Now that inflation has dropped to a rate of 2.9% in July, the central bank has hit the breaks and indicated it may even cut the Federal Funds Rate in September. If so, this could encourage commercial real estate investors to take out new loans, injecting further capital into the commercial real estate industry.

2. Global supply chain issues

Commercial real estate construction relies on global supply chains. As a result, any supply chain disruptions can negatively impact the commercial real estate market. For instance, Moody’s expects to see more tariffs, sanctions, bans, and other government restrictions on trade this year due to political events worldwide, including the U.S. presidential election.

3. Remote work and hybrid models

Whether employers like it or not, remote and hybrid work models are here to stay. According to a 2023 Pew research survey, 35% of American workers with jobs that can be done remotely now work from home full-time, up from 7% before the pandemic.

Naturally, demand for office space has suffered as a result. According to some experts, office sector vacancy rates will stay elevated, putting downward pressures on office rents and values, leading to a $600 billion loss. However, demand for Class A office space is still hot.

Technological innovations

This article would be remiss not to mention some of the tech innovations impacting CRE:

1. Proptech adoption

With tight budgets, many CRE firms are adopting proptech to optimize their operations. Whether it automates setting rental rates, screening tenants, or doing other administrative tasks, proptech can help commercial real estate owners streamline workflows.

2. Sustainable and green buildings

In recent years, many major U.S. companies have committed to reducing their carbon footprint, and 2024 could be the tipping point for investing in sustainable buildings. CRE investors who prioritize green building practices and tech that can track a building’s energy output are poised to have a competitive advantage.

3. Smart building technology

Smart building tech is increasingly popular. From keyless door lock systems to smart thermostats, CRE tenants expect modern features. Commercial real estate owners and property managers who provide them can take a more hands-off approach.

Regulatory and policy changes

Of course, regulations and policies can also help shape the commercial real estate market.

1. Zoning laws and regulations

The country’s lack of affordable housing is often attributed to restrictive zoning. Cities that restrict multifamily buildings, for instance, can be a barrier for developers.

However, many jurisdictions recognize the problem and are advancing policy solutions, such as subsidizing office-to-apartment conversions or loosening zoning restrictions.

2. Tax incentives and deductions

Real estate remains one of the most tax-advantaged asset classes in the U.S. Property owners can defer capital gains taxes with 1031 exchanges, deduct property expenses and depreciation, and participate in various incentive programs.

For example, developers who invest in designated Opportunity Zones can reduce some or all of their capital gains taxes to increase overall profitability.

Commercial real estate challenges

While CRE can be an attractive investment, there are some commercial real estate challenges:

  • Maturing CRE debt: The $929 billion in commercial real estate debt coming due this year amid elevated interest rates is putting pressure on property owners. Many may be forced to sell or refinance at a loss.
  • Rise of remote work: Remote and hybrid work are here to stay, leading to increased office vacancies.
  • AI boom: Recent advancements in generative AI have shifted demand from some real estate types to data centers.
  • Natural disasters: Property insurance costs are up due to the growing frequency of natural disasters, especially in coastal commercial real estate markets like Florida and California. According to Deloitte, the average monthly insurance cost for a U.S. commercial building could increase from $2,726 in 2023 to $4,890 in 2030, registering an 8.7% compound annual growth rate (CAGR).

CRE investment strategies and opportunities

Despite the challenges, CRE still holds many opportunities and winning real estate strategies:

1. Emerging markets and locations

One way for CRE investors to increase their potential returns is to focus on emerging commercial real estate markets. According to Emerging Trends in Real Estate surveys compiled by Nelson Economics, the Sun Belt markets, including Miami, Atlanta, Dallas/Fort Worth, Houston, and Phoenix, are expected to grow in 2024.

2. Diversification strategies

As any wise investor knows, it’s best not to put all your eggs in one basket. To minimize potential losses, consider diversifying your CRE portfolio across property type, market, project type (development vs. acquisition), and investment structure (e.g. limited vs. general partnership).

3. Risk management

Other ways to minimize investment risk include conducting thorough due diligence, carefully screening tenants, actively monitoring properties, securing adequate insurance coverage, avoiding over-leveraged positions, preparing multiple exit strategies, and regularly reviewing your portfolio performance. This is called commercial real estate risk management.

Conclusion

2024 isn’t over yet. Savvy investors can still take advantage of current commercial real estate trends by focusing on the industry’s thriving sectors, responding well to its economic and market drivers, leveraging the latest tech, and complying with recent regulations and policy changes.