As 2024 begins, the commercial real estate industry continues to face challenges. Practitioners and industry influencers believe the year will get off to a slow start amid rising concerns about the fate of maturing loans, with guarded optimism for a busier second half as assets begin to change hands in a meaningful way, particularly if the Fed starts to lower rates. Still, “there is a sense of cautious optimism after nearly two years of turmoil due to rising interest rates and the correlating contraction in trending and investment activity,” according to CRE Expert Predictions for 2024, a LightBox report that looks at how market sentiment will affect the lending, brokerage, investment, appraisal, and environmental due diligence sectors.
The Predictions report first provides context by outlining the post-COVID CRE market phases:
- Phase 1: stimulus and early recovery
- Phase 2: record-high surge with robust activity
- Phase 3: Fed rate-hike disruption, which triggered a market slowdown
- Phase 4: the expected 2024 reset and recovery
The Top 5 Commercial Real Estate Predictions for 2024
CRE market experts interviewed for the report expressed consistent opinions about when deal flow would increase (the second quarter), which property sectors are at the top (industrial and multifamily) and bottom (office), and the concern over the uncertainty created by geopolitical issues. Opinions diverged on the possibility of a recession, the depth of despair in the industry, and the impact of trillions of dollars in loan maturities on the banking sector. As the country heads toward what will likely be a divisive presidential election, there was no unanimous prediction about how different outcomes might affect the industry, though the election year offers a good opportunity for the Fed to lower rates. Collectively, the top five predictions for 2024 are:
- Interest rates will start to drop by the second quarter. The latest Fed statement signaled a notable shift in monetary policy and a growing sense that rates could turn the corner and begin to drop by midyear. All eyes will be on the Fed as it balances a strategy of loosening monetary policy and continuing to curb inflation. Some experts predict as many as five or six rate cuts this year, though that may be overly optimistic.
- The bid-ask spread, which impeded deal flow in 2023, will narrow as prices recalibrate. As this occurs, price discovery will improve and buyers will be less skittish. That said, it’s still unclear to what extent prices will reset, and valuation declines in the teens to as high as 40-50 percent are not out of the question.
- CRE lending and dealmaking will rebound by midyear. As the fog surrounding property values lifts and market confidence improves, investors will be more comfortable penciling out commercial property deals again, a change of pace for those who struggled to close deals in 2023.
- Treasury rates, tied to borrowing costs and cap rates, will stabilize at 3.5 to 4 percent by midyear. This sends a positive signal to investors and lenders that capital can safely move back into play. For some experts, where the U.S. Treasury will land is more important than interest rates, because there is an important relationship between yields on the benchmark Treasury bond, borrowing costs and property values—and therefore, market confidence.
- Secondary market loan sales will increase as distress ramps up. As more CRE loans reach maturity and are challenged to refinance, lenders will take advantage of ways to divest distress that didn’t exist in previous cycles. The time horizons on problem credit concern many property owners because of challenges selling assets in a high interest-rate environment. Still, the current cycle offers more ways to handle distressed assets.
During the next 12-24 months, the fourth phase of the post-pandemic era, the industry will slowly recover, but the path forward will be choppy, given a range of challenges. LightBox will continue to monitor market conditions and share insights from leading industry experts at this time of great uncertainty. You can read the complete version of CRE Expert Predictions for 2024 here.