Top Trends Shaping the 2024 Commercial Real Estate Market
Specializes in providing actionable insights into the commercial real estate space for investors, brokers, lessors, and lessees. He covers quarterly market data reports, investment strategies, how-to guides, and top-down perspectives on market movements.
Today's commercial real estate (CRE) market may appear challenging to new investors as it's driven by various economic, social, and technological factors.
Four years after the arrival of a global pandemic, both commercial and residential real estate continue to be affected. CRE owners and investors have seen demand rise and fall for different types of properties as the arrival of COVID-19 affected the nation's workers, shoppers, and businesses.
In addition, the decline in COVID-19 cases was followed by a scourge of inflation that hit a 40-year high in June 2022. The Federal Reserve raised rates a number of times to put the brakes on inflation, which has slowed somewhat but still has lingered into spring 2024.
As CRE brokers, investors, and developers adapt to these changes, several other key trends have emerged during the past year that are shaping the future of the industry. This article will look at four of these in-depth, beginning with e-commerce.
The Rise and Rise of E-Commerce
Even though the internet marketplace had already begun to affect retail CRE before the arrival of COVID-19, major players saw explosive growth during 2020 and the following years.
For example, Amazon's 2015 annual income came in at $107 billion, increasing to over $280 billion in 2019. Just two years later, 2022 annual revenue was $513,983, followed by a $60 million increase the following year.
The rise in the popularity of e-commerce has affected consumers in a variety of ways, making online shopping an almost daily exercise. However, traditional retail shopping is making a comeback.
While online shopping continues to gain popularity, retail CRE has coped with this challenge by playing on its unique selling points, or USPs.
For example, bricks-and-mortar retail has some distinct advantages over e-commerce, including:
- No lost or stolen packages;
- In-store assistance by trained personnel;
- Fresher groceries at lower prices; and
- The tactile, in-person shopping experience.
Other retail service providers have never been threatened by online sales. These include salons, spas, restaurants, bars, and vehicle dealerships.
Other strategies used by retail CRE investors include adaptive reuse. Vacant retail spaces have been converted into high-demand facilities, such as mixed-use developments, experiential retail destinations, or trade schools, such as Alabama's Montgomery Preparatory Academy for Career Technology.
While retail CRE investors continue to find new ways to preserve ROI, those with office CRE are finding solutions to counter the rise in remote work.
The Rise of the Flexible Workspace
During 2022 and 2023, the nation's workforce and employers alike went through a major transition.
Although many offices re-opened in early 2022, many remote staff insisted on working limited office hours. This created today's hybrid workplace, with over 40% dividing their workweeks between offices and homes.
In response, owners and tenants are creating adaptable, flexible workspace solutions that can accommodate varying occupancy levels and changing business requirements.
Today's flexible office designs may provide both hybrid and full-time employees with the freedom to choose a workspace based on their current project or team. These workspaces may be booked ahead of time if needed.
Other workspaces may feature a mixture of traditional desks, sound-controlled acoustic pods, and lounge spaces. These can be customized to suit the requirements of different tenants and their staff.
Co-working spaces and serviced offices have also gained traction within the 2024 market. These eliminate a business' need to sign a long-term lease. Instead, these offer tenants the flexibility to scale up or down as required. In addition, an investor or business owner may add amenities to attract and retain tenants.
While remote and hybrid workplaces are here to stay, the majority of businesses are still seeking office CRE for their workforce. Most prefer tenancies within buildings with sustainable, energy-efficient improvements. Here's why.
Green CRE Takes Center Stage
As concerns about climate change and environmental responsibility grow, sustainability has become a key consideration in the CRE market. Tenants, investors, and stakeholders are increasingly prioritizing green buildings and sustainable practices.
This has led to a surge in demand for properties with energy-efficient features, renewable energy systems, and Leadership in Energy and Environmental Design (LEED) certifications.
LEED-certified office buildings are equally popular with buyers as with eco-conscious tenants. Recent data found that LEED-certified, Class A suburban offices sold at a price that was over 40% higher than non-certified buildings.
Investors in LEED-certified Class B office buildings achieved even higher ROI when selling, with these buildings selling at prices over 75% higher than comparable, non-certified offices.
The next trend affecting this year's CRE market is both significant and challenging: rising interest rates.
Will ROI Outwit Higher Interest Rates?
Today's CRE investors are faced with challenging situations. Although higher interest rates often pose financing challenges, a property's potential ROI may outweigh a higher price, depending on the classic supply versus demand equation.
However, current CRE investors may have an edge, determined by a property's cap rate.
The commercial real estate cap rate is a metric that gauges a CRE property's potential risk and return.
Similar to multiples in equity markets, cap rates are measured as percentages, typically from 3% to 20%. This measures the amount of time it takes for an investor to recover their investment.
Historically, CRE investments have outperformed other investments during inflationary periods. Although rent growth rarely kept up with information, CRE's cap rate compression often contributed to outperformance.
Cap rate compression, which averaged roughly 20 basis points annually during the past period of inflation, contributed significantly to total returns.
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