10 Critical Questions for CRE in 2024

By Kevin Thorpe, chief economist, Cushman & Wakefield

It was an uphill battle for CRE in 2023. Higher interest rates, elevated inflation and the threat of a recession all contributed to a year of turbulence and uncertainty. Despite the challenges, the industry demonstrated bright spots of resilience and adaptability. What does that mean for 2024? 

Here are 10 Critical Questions we’re asking, along with our predictions for 2024:

1.Are major U.S. cities headed for a doom loop?

No. While facing challenges, cities have proven to be resilient. Net out-migration is now lower in the six U.S. gateway markets than it was in 2018 and 2019. Additionally, after decreasing for five years, international immigration—the key driver of population in large, gateway cities — is back above the 30-year historical average. Note: Six U.S. gateway markets are Boston, Chicago, Los Angeles, New York City, San Francisco and Washington, DC

2. When will the Fed pivot?

Q2 2024. Pay attention to the personal consumption expenditures (PCE) price index, which is a measure of inflation. Even if the labor market softens, PCE inflation must improve or show sustainable downward movement toward the Fed’s 2% target. If this doesn’t occur, the Fed will not budge, and H4L will extend beyond what we believe.

3. Will we see an avalanche of distressed assets in 2024?

No. Although distress levels will continue to rise, it will not be an avalanche. Although middle and low-quality office assets are under significant pressure, and loan maturities will create pressure across all product types, it is worth noting that NOI is up considerably over the life of the average loan expiring over the next three years. 

4. Do alternative sectors have as much resilience as we think?

Alternatives have unique, long-term tailwinds that will require substantial expansion in real estate footprints. Keep an eye on how much fund allocations toward alternative sectors grow over the next year, as investors diversify from traditional CRE sectors.

5. Will the U.S. fall into a recession in 2024?

Yes, in Q1 2024. Watch for a de-inversion in the yield curve. Historically this has been driven by declines in the federal funds rate, however, a recent steepening at the long end caused the spread to become less negative. On average, the 10-year/3-month Treasury yield curve de-inverts 4.4 months before a recession starts.

6. Has the wave of multifamily construction reached its peak?

Not yet. While the multifamily market will likely face supply-side pressure in 2024 and in the early part of 2025, the bulk of the supply wave delivered in 2023 and will continue through the first half of 2024. With more than 60% of construction in mid- and high-rise product, supply pressure will remain through 2024.

7. With industrial demand slowing and vacancy rates rising, will rents decline?

No. While rent growth will slow in 2024, rents will not decline. Markets will see vacancy rates climb due to softer demand and a wave of new supply delivering throughout 2024, but vacancy will remain below the long-term historical average before recompressing again. As a result, rent growth will persist but at a more sustainable, modest pace in the coming year.

8. Will rising consumer debt halt retail’s comeback?

No. Although pockets of weakness will emerge, the retail sector’s fundamental tailwinds are expected to remain healthy for the next several years. Households have become increasingly reliant on credit to finance spending in the face of higher consumer prices. Now, some borrowers are having trouble paying down debt, which is leading to a pullback in spending. We’ll be watching whether this dynamic spreads to more households and whether retail companies react by scaling back their real estate footprints.

9. Is there enough office space to meet the flight-to-quality demand?

Not long-term. There is a limit on the availability of top-tier office space. This top-tier office space, however, only accounts for 10%-15% of total inventory, and the pipeline of new product is less than half of what it was three years ago.

10. When will we see capital markets turn the corner?

Best guess: H2 2024. While lending standards remain historically tight and in contractionary territory, we’ve seen early signs of an inflection in multifamily and construction. Meanwhile, the office sector is likely dragging the commercial loan series into tighter territory. A Fed pivot will give lenders more clarity, stabilize financial markets (base interest rates), and provide a healthier foundation for lending.

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