The real estate sector will recover in 2024, with peaking interest rates and more clarity on future financial performance and valuation. This more predictable environment gives investors more confidence to re-enter the market with less apprehension. Private commercial real estate lenders fuel this optimism by offering quick financing solutions.
While 2023 proved challenging for real estate investors and deal-makers, 2024 is proving a significant improvement. The industry is optimistic, and there are more opportunities than ever. The industry certainly seems more stable. Investors shouldn’t let their guard down — plenty of geopolitical risk and interest rates are still high.
Looking ahead, 2025 might not shatter real estate fundraising records, but 2024 is undoubtedly jumpstarting opportunities for investors to get back into the business. This blog will discuss the significant improvements observed in commercial real estate so far, as of mid-year 2024.
Market outlook and overview
Based on the latest M&A Explorer by White & Case, global real estate deal value has decreased dramatically since 2007, with the year-on-year deal value dropping 52% to US$139.68 billion in 2023 from US$293.97 billion. Unsurprisingly, PERE also found that real estate fundraising activity fell to the lowest levels since 2012, hovering at US$138.83 billion from US$224.63 billion in 2023. The decreased fundraising and deal value is a negative impact of rising interest rates and high inflation on real estate markets in Europe and the US. It also reflects the liquidity squeeze of the Asia-Pacific Chinese real estate sector.
Despite these challenges, survey findings indicate the market is turning the corner. Private commercial real estate lenders are also optimistic about prospects in 2024. Although interest rates have peaked in the US, Europe, and the UK, they remain stable while inflation is under control. This should help real estate investment activities rebound and narrow the gap between sellers and buyers on valuation to encourage smoother deals.
Investors must proceed with caution.
Despite the positive outlook, investors and commercial real estate hard money lenders seem to be adopting a cautious approach — and rightfully so. Opportunistic strategies are currently considered the most favourable for fundraising, followed by development and core value-added strategies. With this measured approach, even if interest rates decrease and cause a liquidity mismatch (where there’s a shortage of cash readily available), real estate should remain a viable investment option for investors and well-capitalized lenders.
In addition, looming debt maturities and high rates are elevating the pipelines of non-performing real estate loans. As a result, many investors expect an increase in NPL portfolios in 2024. Geopolitical risk is also a concern. With many major global economies having their election this year, political instability becomes a socio-political risk for real estate.
Fund strategies and sectors
Disruptions in real estate valuations during 2023 — primarily fueled by factors like issues in the Chinese market, a looming debt maturity wall, and increasing liquidity concerns — paved the way for opportunistic fund strategies to take center stage in 2024. Rising inflation and interest rates likewise reshaped the market and forced a recalibration of expectations and valuations. However, this disruption opened lucrative opportunities for commercial real estate investors.
Despite relative stability in interest rates in 2024, financing costs and liquidity remain significant concerns for commercial real estate investors. Opportunistic fund strategies (including real estate secondaries, debt funds, and capitalizing on potential shifts in post-pandemic real estate usage patterns) can introduce much-needed capital for borrowers.
Digital infrastructure is thriving while offices under-perform
Lockdowns have significantly impacted the office sector. Many employees still work remotely long after the government lifted restrictions. This shift in work habits has, unsurprisingly, reduced the demand for office space — and the trend continues in 2024. Retail is also likely to face lower demand as online shopping continues to be a preferred option for many consumers.
However, commercial real estate lenders and investors are bullish on three sectors for potential valuation outperformance: healthcare and life sciences, residential real estate, and digital infrastructure.
As digital infrastructure continues to be in demand, consumers and businesses require more data for entertainment, work, and shopping. Data analytics and generative AI are rapidly growing and are expected to raise data demand further. This long-term and solid growth is making deal-makers and investors maintain their investments in the space, even with broader market dislocation.
The living and residential sector is also holding up even with rising alternative mortgage financing costs and interest rates. The rising ownership costs and urbanization are persistent drivers that support residential asset valuations. Meanwhile, increased student enrollments in tertiary education and the need for housing space influence the demand for purpose-built accommodations. Commercial real estate lenders are partnering with biotech and life sciences companies in the life sciences and healthcare area to provide sufficient funding for building or expanding laboratories.
Technology, ESG, and operations
Financing costs and availability are currently the main operational risks 2024, followed by construction costs and liquidity. Real estate operators must juggle financing challenges with socio-political uncertainty, digitalization programs, and ESG implementation.
Even though interest rates might stabilize in 2024, financing costs will likely remain higher compared to the historically low rates of 2021. This anticipated increase in financing costs presents an operational challenge for many real estate groups (particularly when refinancing existing loans).
Inflation’s lingering effects make operators extra cautious, especially regarding resource availability and construction costs. Political instability is considered the biggest risk in the socio-political area.
Ensure sufficient funding for commercial real estate
This year, borrowers turn to private commercial real estate lenders to secure reliable funding. At Private Capital Investors, we offer the best range of commercial real estate loans, from hard money solutions to bridge income loans. We have a track record of providing $2 million to $50 million and approving applications within 24 to 48 hours.
Try our stated income loan if you cannot get traditional loans from conventional sources. As a private lender, we can provide minimum documentation for your required commercial real estate loan.
Apply today by filling out this form or by calling 972-865-6206. You may also email info@privatecapitalinvestors.com for more information about our commercial real estate loans.
