With the end of 2023 and the first quarter of 2024, it is a good exercise to take the time to focus on what issues in commercial real estate will dominate in 2024.
Office Buildings—Vacancy and Refinancing Issues:
One major issue in 2023 which continues to be an area of focus in 2024 is the concern with sections for investment in the real estate spectrum that will do well and those that will not do as well. The high vacancy rates in many downtown office areas, among others, will continue to be a major problem for the office real estate market throughout the US in 2024.
The questions as to what percent of employees will Return To Office (RTO), the cost of space, tenant finish, and refinancing at higher rates and with lower valuations for buildings will be additional hurdles that investors (and lenders) face in 2024 as to office buildings.
Housing Needs in 2024:
These factors of concern noted above are not limited to office buildings. There is more and more discussion on the horizon as to over-building issues related to multifamily buildings. Yes, there is a need for a place to live. However, there is a shortage of single-family homes available for purchase. This shortage in turn is pushing the median price of housing to a much higher price per unit. This concern, coupled with increased interest rates and inflation in general is generating anxiety in the single-family marketplace as well as causing a focus on affordability in the multifamily area. Some multifamily housing may not be overbuilt as to the number of units. However, the high price of luxury rental units is a concern in many areas, where a large percentage of tenants may be priced out of such luxury rental market.
Counselors of Real Estate—Key 2024 Issues:
The summary noted below focuses on 10 areas addressed by the Counselors of Real Estate (CRE) and provides a good visual of many of the concerns that must be addressed in key areas of the economy, including commercial real estate. (For more on these 10 areas and the detailed report by the Counselors, see https://cre.org/external-affairs/2023-24-top-ten-issues-affecting-real-estate-narrative/)
The above issues are only a small smattering of the concerns in the real estate market at the beginning of 2024. The Counselors of Real Estate (CRE), established in 1953, is a consortium of credentialed real estate experts who provide advice on major and complex real estate issues. This Organization, part of the National Association of Realtors, focuses each year on what they have labeled as the “Top Ten Issues Affecting Real Estate.” For 2024, they have identified the following issues of concern:
Political Unrest and Global Economic Health: This issue simply identifies the concern we all should have with political unrest and global issues, such as war, economic concerns, etc. As we know, although it is often stated that real estate investments must focus on local factors relevant for a given area, all real estate is also impacted by macro issues, such as major banking and financial concerns on a global basis.
Hybrid Work Issues: This item addresses many areas, including the RTO question, raised above.
Global Housing Shortage: The need for housing is the concern as to this issue, such as the desire for ownership or rental of an abode, as mentioned above. This is in light of the shortage of housing as noted.
Artificial Intelligence (AI): AI has been in the news on a constant basis for many years, especially during 2023. Look for this technology development to continue to be important in many areas of our lives, not limited to real estate.
Labor Shortage: Each business area will have a demand for employees. Where skilled workers are required, this, too, will be a strong concern that will impact real estate. Are the workers available in a given area?
Migration: How parts of our population in the US will move, what areas are favored and what areas will lose population will continue to be important elements in supply and demand in the real estate area. Migration patterns are affected by many variables; the major concern in this area as seen by the Counselors examination of the Top 10 issues is affordability.
Financial Issues: The difficult positions faced by real estate investors, lenders, and others in the real estate field because of higher interest rates, valuation issues, inflation, and concomitant concerns will plague the real estate industry in 2024, as mentioned at the outset of this TIP.
Supply Chain and other Logistical Issues: This area of trying to meet the requirements for inventory and other supply concerns will be a continuing issue in 2024 as it was in 2023. Alternative supply lines and alternative supplies and materials will also be important in the real estate area, such as trying to provide construction materials.
Pricing: Pricing is a difficult issue in general. With stronger inflation, disruption in shipping and supply lines, and repricing of materials and goods, pricing will continue to be of concern in 2024.
Infrastructure: Within the US, the governments, on the Federal and state levels, have voiced concern with the poor conditions that exist in the transportation industry and means of transportation via highways, waterways, airways, bridges and other support needed to allow for the timely and efficient movement of goods, services, and people. This area will continue to suffer from a lack of attention and financial support. The weak transportation sector and structure damages the ability to maximum the use of real estate, other resources, and individuals.
By Dr. Mark Lee Levine, Professor of Real Estate, UNIVERSITY OF DENVER