Will the Commercial Market Hit the Reset Button in 2024?

As the real estate market adjusts to new norms in a post-pandemic world, the commercial and investment property sectors are shifting. A retail rebound, changing investor sentiment about climate risks and eroding affordability are among the top trends commercial real estate professionals are contending with, according to the “Emerging Trends in Real Estate 2024” report from the Urban Land Institute and PwC.

“It is clear that the real estate industry is entering a new era of thinking, building and operating,” says Anita Kramer, senior vice president of ULI’s Center for Real Estate Economics and Capital Markets. “The emergence of hybrid work models, the strength of the retail sector and the growth of Sun Belt markets underscore the new reality on the ground, specifically in our top cities—Nashville, Phoenix, Dallas/Fort Worth, Atlanta and Austin—to watch in 2024.”

The report also cautions about a slowdown in development and investment prospects heading into 2024. “Industry professionals are at a turnkey moment that will require both innovation and adaption to shape a resilient real estate landscape for the future,” Kramer says. Labeling it “The Great Reset” in real estate, ULI and PwC’s report notes some of the following “emerging trends” to watch in 2024.

1. The retail rebound. Demand for retail property has skyrocketed over the past 18 months, with about 35 million square feet of new retail space in the U.S. across all shopping center types. “The industry is coming to realize that the nation will keep shopping for most of its goods and many services in shopping centers indefinitely, even if e-commerce continues to take market share away from in-store retailers,” the report notes. Retail has strengthened as an investor preference compared to recent years when it was deemed one of the most troubled asset types. The suburbs remain an attraction for retail investors, and grocery-anchored community or neighborhood shopping centers account for 25% of the nation’s retail inventory.
2. Hybrid work isn’t going anywhere. Office employees are showing their preference for a hybrid work setting, a mix between remote and in person. As such, office buildings are losing their appeal with investors: transactions have fallen more than twice as much as any other major property type. Industry experts are growing concerned about what to do with high vacancies in office buildings, turning to adaptive reuse or even demolishing and repurposing the land when buildings can’t be used as conversions.
3. Sunny prospects in the Sun Belt. The southern part of the U.S. has emerged as a magnet for growth. Firms and investors are being drawn to the region due to lower regulations, taxes and a growing labor force. The ULI and PwC report notes that the majority of cities on its “markets to watch” list with the best real estate prospects in 2024 are located in the Sun Belt. Industry experts expect many areas in the Sun Belt to continue to see growth due to ongoing, robust migration trends. However, the report cautions that rising risks from climate change, such as excessive heat, could eventually affect the trend of positive investment in the area.
4. Debt comes to the forefront. “Rapidly rising federal debt could potentially ‘crowd out’ private investments in the industry, leading to slower economic growth and higher interest rates, both of which would create long-term delays on property construction, investments and returns,” the report warns. Credit has become more expensive and more difficult to get. Still, despite the lack of credit availability, “some investors are cautiously pursuing deals and lining up to take advantage of undervalued assets. The industry is seeing its highest ‘buy’ rating since 2010, signaling a favorable entry point for acquisitions after a decade of unabated appreciation.”
5. AI advancements get CRE’s attention. Artificial intelligence received plenty of buzz in 2023. But CRE applications were “limited” and “most mundane to date,” the report notes. However, industry experts expect that to change, with greater applications starting to emerge that aim to enhance the property search and analysis process, reshape how investors assess potential investments, improve the customer experience and provide greater fraud detection in real estate transactions. The report also points to the potential for AI to predict property climate risks, identify investment opportunities and create higher-performing real estate portfolios. Expect greater offerings and experimentation with AI in the 2024 commercial market, the report notes.
6. Climate change becomes pressing concern. Billion-dollar climate events in the U.S. are rising, which has led to government regulations and proposed ESG mandates. “Property owners and managers have more reasons than ever to make ESG a priority,” the report notes. Developments may need to be repositioned to spotlight their sustainability, and more buildings likely will need to be retrofitted. “Not every building will be converted; some assets will simply become obsolete and need to be demolished,” the report also notes. In those cases, developers and architects are exploring the design for “disassembly,” which allows for the easy recovery of products, parts and materials when a building is disassembled or renovated.
7. Downtowns are poised for another reinvention. Urban economists are debating the future of downtowns and how economic forces have been hampering these once-bustling business hubs. Concerns are growing about an “urban doom loop,” as empty office buildings have been left behind in urban cores after employers relocated to the suburbs or downsized their office spaces. This also has led to a decrease in tax revenues, forcing cities to reduce services and possibly stall future commercial and residential growth. The report says downtowns likely will need to be redeveloped, as they have been in the past, and focus on building up their “live/work/play” allure to compete with the growth in the suburbs. This may include conversion of empty office buildings, addressing public transit deficiencies and “third places”—community spaces where people congregate.
8. Housing affordability deteriorates. Like the residential market, affordability also continues to be a top challenge for the commercial sector. The U.S. has experienced the fastest-ever deterioration in real estate affordability over the past three years as housing prices soared during the pandemic. Further, mortgage rates have more than doubled in a short time. “After sharp rent escalations last year, rent growth has eased for now due to large supply deliveries but is expected to resume,” the report notes. “One answer has stood out to solve the affordability crisis: Build more housing—preferably at all price points.”