Mixed Signals for the Commercial Real Estate Outlook
As we surpass the midway point for 2024, the outlook for the commercial real estate industry shows signs of both promise and challenges. The second-quarter survey from Altus Group assesses the perspectives of industry representatives on the current and future states of the market. The key takeaways from Q2 2024 include:
- 49% of those surveyed do not expect a recession in the near-term, however the number of those that do expect a recession has increased 7% from Q1.
- 49% of respondents expect interest rates to remain stable over the next year, but 40% also believe the cost of capital will increase.
- There has been a significant rise in net capital availability expectations: 20% for companies that deal with mortgages (REITs), 22% for insurers and 36% for bundled loans (securitizations).
- The average expected return on investments in real estate (IRR) is 12.4% across all property types, up slightly from Q1. The four main property types (retail, multifamily, office, industrial) saw an average rate of 12.2%.
- 80% of those surveyed expect to buy or sell real estate in the next 6 months, with 91% of the largest firms expecting to make deals, up from 83% in Q1.
Opportunities Amidst Uncertainty
Moody’s second-quarter analysis offers a slightly more optimistic perspective for the rest of 2024. Their report emphasizes the stability and potential growth in several commercial real estate sectors, with the office sector still showing signs of challenges:
- Multifamily: Apartments and multifamily properties remain strong overall with effective rents growing by 0.3%, showing a flat vacancy rate of 5.7%.
- Retail: Retail continues to evolve with the combination of online and in-person shopping, keeping the vacancy rate stable at 10.4%.
- Industrial: The industrial sector has performed well over the last few years, but demand has slowed due to rising interest rates, increasing the vacancy rate to 6.5%. This is still lower than the industry’s pre-pandemic average.
- Office: The office vacancy rate rose to 20.1%, surpassing the previous record of 19.8%. Concern over future drops in demand and vacancy increases remain.
While the rising interest rate environment, ongoing political conflicts and upcoming elections pose potential economic threats, there are opportunities and challenges for commercial real estate investors to capitalize on in the second half of 2024. These include:
- Liquidity Optimization: While lower interest rates may make loans more attainable, they also reduce returns on liquidity. Investors may consider conserving their liquidity for future deals and utilizing tools such as treasury services and rent payment solutions to manage their cash flow effectively.
- Fraud Protection: 65% of organizations reported attempted or actual fraud in 2022, highlighting the need for strong security measures. Commercial real estate owners and operators are susceptible to check and rent payment fraud. Staff training is recommended to identify and prevent cyberattacks and fraud attempts.
- Workforce Housing Solutions: Focusing on units with rents significantly below market rates increases the ability to target a wider income range than traditional affordable housing options. This could be a significant opportunity for investors seeking to contribute to solving the housing shortage.
Reach Out to an Advisor
Contact an RCM&D advisor to learn more about how we can help your organization navigate the dynamic commercial real estate market, protect your investments and achieve your long-term goals.