Midyear Check-In: Commercial Real Estate Market Gains Momentum

The year began with unbridled optimism. After a challenging 2023, commercial real estate stakeholders welcomed the start of a new year with high hopes for a swift change. Market experts expected lower interest rates and more capital availability; increased investor appetite with stabilized pricing; and healthy occupier demand. Many of those anticipated changes, unfortunately, didn’t come. Instead, the first half of 2024 has felt a lot like 2023. 

The midyear commercial real estate market reports are out, and it seems like some of those optimistic expectations from January are finally happening. As always, trends are not uniform across the industry, and investors and developers will have to navigate through the ups and downs. 

Here, we’ll take a closer look at some of the key aspects of the industry, from the capital markets to construction to multifamily and the new commercial real estate market outlook for the second half of the year.  

Optimism Grows in Capital Markets

At the start of the year, several well-respected economic forecasts predicted aggressive decreases in interest rates in the first six months of the year. Yet, in the first half, the Federal Reserve declined to move the needle on interest rates. Experts agree that changes are finally coming in September, after Federal Reserve Chair Jerome Powell signaled a change in strategy at the agency’s annual retreat in August. While interest rates will still follow a higher-for-longer trend, decreasing rates—even modestly—will help to spur investment appetite in the second half of the year, according to research from CBRE. Despite an improving capital environment, CBRE also expects cap rates to continue to rise, representing a 15% decrease in asset values. 

Construction Market Stabilizes

Labor shortages and supply chain challenges have created a difficult construction market since the onset of the pandemic. Overall, developers have had to navigate through extreme price increases and volatility. In the first half of the year, price growth was lower than expected, and in the second half of the year, construction cost growth will be modest, according to research from JLL. Developers should expect prices to continue to increase, but at a much more moderate pace. Plus, construction spending is now outpacing employment spending. That is a good sign that developers are able to absorb rising costs, helping to fuel an increase in new construction starts in the second half of the year and contributing to better margins on new projects. 

Multifamily Market Battles Oversupply Challenges

The multifamily market has been the most resilient commercial real estate asset class in the last several years. Despite a 70% decrease in investment volume, the multifamily sector has experienced unyielding tenant demand and steady rent growth—providing many existing owners an opportunity to hold onto cash-flowing assets until the dust settled on interest rates and investors returned to the market. That dynamic will come to an end in the second half of the year, thanks to the largest onslaught of new construction deliveries in decades. The new supply will weaken occupancy and rent growth. Thankfully, this should be a temporary dynamic while the new supply is absorbed. The nation remains severely underhoused, and in the long-term supply-demand fundamentals continue to support strong multifamily operations and fundamentals.  

Office Market Finds Bright Spots

Unlike the multifamily sector, the office market has suffered significantly in the post-pandemic world. Remote work has severely suppressed office demand, leading to a substantial decrease in office property values. However, office leasing is showing signs of improvement. The tenant-friendly market is creating activity for high-end, quality office space. CBRE expects leasing activity to improve by 5% in the second half of the year. Although demand still remains 20% to 25% below pre-pandemic levels, it is a significant improvement in leasing demand after several years of negative growth. With the increase in demand alongside reduced availability of prime office space, CBRE anticipates office rents will grow 3% in the second half of the year and reduce supply-side risks. 

AI Drives Evolution in the Commercial Real Estate Market 

The rapid adoption of AI technologies is changing commercial real estate, affecting everything from demand to investment to new construction design. For developers, AI adoption will mean demand for smart buildings that are reactive to occupants, like adjusting heating and cooling, lighting and other building functions. Developers will also leverage AI to create mixed reality spaces that are adaptable to new needs, overall transforming physical spaces to better respond to user needs. While these changes are over the long term, research from JLL noted that commercial real estate stakeholders should begin preparing for the shift now. 

Many developers have already started evolving by adopting transformative new technologies to guide and direct the management of a new construction project. Modern real estate development software like Northspyre to manage budgets, produce financial forecasts, automate administrative tasks and use predictive analytics to produce targeted outcomes on the project. Northspyre has unveiled its own AI programs this year, showing that the technology is also rapidly evolving alongside tech advancements and user demands. Developers that have already incorporated this type of technology are ahead of the curve in designing forward-looking new developments. 

Like most of the business environment, the commercial real estate industry has suffered from macroeconomic dislocation. While improvement has come later than expected, in the second half of the year, investors and developers will finally see some reprieve. There are still headwinds to navigate, but the market is finally starting to look up.   

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