The future of the CRE industry during the pandemic situation has always been the talk of the town. After all, there have been a lot of changes brought in the industry, and it has suffered greatly.
Given how the U.S. economy is performing right now, there are a lot of concerns regarding the industry and its future. Luckily, there are bright spots for CRE. Mostly, there is a strong demand in the retail and multi-family sectors.
However, if you are someone new in the industry and wish to invest in the best type of commercial property, then make sure that you read ahead, as it will provide your insight into the top-performing industries of CRE in 2024.
With this, you will be able to make the right decision and make the most of your investment.
Difficult economic realities
Cost and capital availability
The U.S. in the current time is in a period of rising interest rates, which began two years back when the Federal Reserve started raising the rates to fight inflation.
The primary effect of hikes is quite obvious. Now, the cost of borrowing has increased greatly and will likely remain high.
Although higher mortgage rates are not always good for the borrowers, they can be quite devastating for the CRE investors as well, who borrow heavily and then rely on refinancing every 3 to 5 years.
The problem can be more severe as the banks have started to tighten their lending standards or have refused to give Commercial real estate loans at all.
Further, not only the CRE loan costs are higher these days, but they are also hard to find, making it challenging for investors.
Potential recession
The post-pandemic inflation is on the high, and it’s causing a lot of trouble for CRE investors. The Federal Reserve responded to inflation with an increase in the rates.
The goal here is to combat the rising prices by slowing down the economy.
Unfortunately, an increase in the rate, particularly in the dramatic and rapid ones, can push an economy into recession.
In other words, CRE is now facing a significant possibility of an economic slowdown into 2024. This would mean that commercial landlords will struggle to find vacancies and even raise rents.
Persistent inflation
A longer period of relative price stability and low inflation ended in a bad way three years ago. After an alarming and initial spike, the inflation rate has been moderated, but still, they are too high, and the overall price has been slow in receiving.
Thus, commercial property investors are not at all immune to the effects of inflation. The cost of maintaining and operating a building or providing the amenities to the tenant is a lot higher than it was 36 months ago.
Now, when we consider large increases in labor costs, the problem is generally pronounced. This is especially true for developmental and construction firms that depend majorly on specialty labor.
Further inflation can also cause anxiety in individuals who are end users of CRE. During the current inflation time commercial property owners are suffering just as people who cut spending, which in turn will cause businesses to delay or cancel their expansion plans.
Understanding the impact on various CRE properties
Office space
The work-from-home culture gained a lot of momentum during the pandemic time. However, it has severely disrupted the office sector. In fact, disruption can be an understatement here.
Despite several million jobs being added to the U.S. economy during the pandemic recovery offices indeed have lost about 100 million square feet of occupied space. This has resulted in property values going down.
The corporate managers now fear that working from home will erode corporate culture and will also discourage employees from coming to the office for work so they are doing it all to bring the employees back into the office buildings.
But in America, their efforts are failing. Office space utilization in the U.S. is only around 50% after the pandemic levels.
It is quite clear that the workers who like to work from home have become a lot more stubborn, and the CEOs who want them back have very little leverage.
So, in 2024, one can expect U.S. office space to continue to be underutilized unless and until there is a huge change. For instance, a job-killing recession would definitely tip the balance toward the employer and offer them a chance to force the employees back into the office.
Retail space
Retail spaces are clearly related to consumer sentiment, which was quite weak during the first half of the year. But it began to recover during the second half.
The recovery can be a result of the ease of the inflation rate and energy prices modernization.
As seen by bankruptcy filing the weaker retailers are now falling by the wayside. However, the healthier ones or the higher quality stores are doing great, and they are picking up the pace. The store openings have definitely outpaced store closings so far in 2023.
However, it is also quite crucial to note that the retail availability rate will reach a record low of 4.6% due to the poor supply of new available places.
Also, only 14,000,000 square feet of new multi-tenant retail space is available or scheduled for delivery by next year, which is half the amount of the projected demand.
In addition, the small malls are also struggling, but the better malls have been able to invest in their properties and are able to go tight with the right mix of exciting brands.
In general, there are now better retailers who are offering great locations and services and also decent quality.
This will continue to absorb and displace weaker competitors in 24 hours. Well, the demand for retail rental should be maintained in 2024, but there will be a consolidation rather than the overall growth.
Also, you need to keep in mind a recession will depress the consumers and the retail sector to a greater extent.
Multifamily housing
One can expect a new wave of supply in the coming year. There are roughly 900,000 units currently under construction. This shows the rent is expected to grow by a bigger than average of 1.2%. The vacancies will also increase more than the pandemic levels.
However, it is crucial to note that the report also stated there should be enough demand that keep the average occupancy rate above 94%.
Even in the coming year, buying will remain more expensive than renting, which will leave more people seeking an apartment property. Thus, there is no denying the fact that investing in multifamily property is expected to perform well.
Other sectors
The other industrial real estate sector will be quite active during the next year. It is forecasted that there will be a 7.5% increase in U.S. industrial production over the next five years.
The space will be available for manufacturing and distribution purposes. Also, there will be airport hotels and resorts that will register slow growth.
If the stats are to be believed, demand will continue to be more than supply for data center markets such as San Antonio, Austin will attract developments due to land availability, infrastructure, power, and tax incentives.
But one can only hope that these things work for the investors and they are able to put their money in the right place.
Confronting the challenge
The U.S. economy is facing a lot of challenges as of now. It is quite crucial for the investors to understand the market condition and then put their money as this can result in a huge loss.
The gross domestic product, which is the measure of the U.S. economy in the 3rd quarter, increased to 5.2%. At the same time, consumer spending was close to 70% of that.
Despite this, there are a lot of challenges that are to be faced.
With proper research and market understanding the investors will be able to make the right decision and will grow properly. It is all about a deep analysis which will be beneficial for everyone.
Irrespective of the industry type the investors need to be careful. The above-projected rates certainly show a slow economy for the industry in the coming year, but still, with proper analysis, there is hope for the investors.
So, instead of worrying about what’s next, it is better to start planning now and take proper initiatives for better growth and investment in the coming year.
Conclusion
When it comes to investment, financing happens to be one of the major aspects. If you are facing difficulty in acquiring financing, then you can definitely rely on the experts of Private Capital Investors to offer you the help.
They are one of the leading agencies that will provide you with clear insights about the best loan options.
They will guarantee you are able to get the financing at a lower rate and as per your criteria. Their experts are ready to offer you all the assistance you need.
So better get in touch with them as they will offer you the best help possible. You can rely on them to get the financing option as early as possible well.
