The U.S. commercial real estate (CRE) market enters 2024 balancing hopes for a better year with fears of a more significant downturn. Volatile interest rates consumed capital markets over the past year, but strong property fundamentals have acted as a counterweight. We expect the CRE market to enter a new phase of its correction, with activity improving as 2024 progresses but interest rates continuing to weigh on property values and equity returns.
Key takeaways
- 2023 was a challenging year for the CRE market, with activity and prices moving lower.
- The clash between strong fundamentals and high and volatile rates will continue in 2024.
- Dispersion is widening, and risk/return in debt looks to be more attractive than in equity.
2023 was among the most challenging years for the commercial real estate (CRE) market since the end of the Global Financial Crisis (GFC). Despite a U.S. economy that likely grew north of 3% during the year, the CRE market was forced to reckon not only with a world in which interest rates halted their decades-long secular decline, but also one where rate stability has seemingly vanished. This flavor of correction is unique: It is neither a crisis of capital markets liquidity (like the GFC) nor one of property fundamentals (like the COVID period for some sectors). Rather, it has been a correction predicated on a sharp rise in the cost of financing. The good news about this type of downturn is that it is generally less acute; while sharp degeneration in liquidity or fundamentals hits the market quickly, an increase in interest rates works its way through more gradually. The bad news is that, for the same reasons, the correction process could take longer.
As a result, we believe the correction in the U.S. CRE market will continue to play out in 2024, but also a new phase will emerge as the year progresses.
Read the complete Q1 2024 commercial real estate outlook to learn more.
