The 2024 Commercial Real Estate Outlook Is Hazy

Often in the financial markets, investor sentiment is among the most telling indicators of market condition. Sentiment alone can swing the stock market, cause digital bank runs (think Silicon Valley Bank), stall lending markets, direct asset pricing, or spur the economy. Often, it’s a crystal ball for future investment activity. For 2024, unfortunately, that crystal ball is hazy. Investors in Deloitte’s 2024 Commercial Real Estate Outlook survey seemed split on their yearly outlook for 2024 and on the core fundamentals that shape the asset class. This drastic split in investor outlook is uncommon and hints at a tectonic shift in the market and its future.

When it came to multiple metrics that inform investment in real estate property, respondents to the survey were evenly divided when asked if the market would worsen, remain unchanged, or improve. While the survey questioned investors on multiple fundamentals, revenue generation, cost of capital, and property prices seemed to be the topics where respondents were most divided. While it’s always difficult to prepare for an unknown future, there are technology solutions to help developers mitigate the impact of deteriorating market fundamentals and better navigate through a challenging market. 

Here’s a look at the top forecasted commercial real estate trends to look out for in 2024.

Reduced Revenues

Investors don't expect revenues to remain stagnant this year, but they remain split on whether or not revenues get better or worse, according to Deloitte's survey. In response to a question forecasting revenue, 43% of North American commercial real estate investors expect revenues to worsen while 44% expect revenues to improve. The remaining 13% of respondents expected no change in revenues. Although CFOs were split about the trajectory of income, most are cutting costs as a precautionary step. In 2024, 40% of CFOs said they plan to reduce expenses, up from just 6% who said the same for both 2023 and 2022. Concerns about revenues and profitability largely stem from macroeconomic trends, like higher interest rates, that can impact financial performance. 

While it’s true the question doesn’t account for specific properties, investment strategies, or types of companies, investment performance and profitability in the coming year will likely vary based on all three of these factors. Multifamily and senior housing investors in a similar outlook survey from PwC were bullish on revenue in 2024, with the report suggesting that revenue growth in these asset classes would be high enough to offset rising capital costs. 

Owners who are concerned about revenue projections should look for solutions in technology. Automation is the primary way that businesses can capture lost revenue. Automation allows businesses to operate on a lean staff and budget without productivity loss. Software tools that automate the majority of administrative tasks will provide the most value for organizations looking to offset revenue loss through more efficient business practices.

Cost of Capital

The cost of capital has been the primary point of concern for investors this year. The Fed increased interest rates nearly a dozen times in 2022 and 2023 to tame inflation, more than doubling the cost of capital along the way. In the most recent meetings, The Fed has stalled rate increases and has even signaled lowering rates several times next year. Even with optimism coming from the Fed in recent months, industry leaders are unsure about the cost of capital next year. Half of respondents expect capital costs to worsen next year, while the remaining half expects it will either be unchanged or improve. 

The cost of capital is only part of the story. Capital availability is also a concern, as banks have tightened lending standards and restricted capital. Like the cost of capital, respondents to Deloitte’s survey were unclear about capital availability in the coming year, with nearly 50% saying capital availability will worsen and the remaining half expecting capital availability to either stay the same or improve. 

For property stakeholders concerned about capital costs and availability next year, there is a technology solution. Software programs like Northspyre utilize technology to help developers better manage budgets, track spending, and use predictive analytics to proactively respond to market changes. As a result, developers are able to operate on trim budgets and significantly reduce overages incurred along the way. The savings could offset higher capital costs by improving the overall investment in the property. Ultimately, investors would have more opportunity to absorb higher capital costs and offset the cost elsewhere in the budget. 

Property Values

Higher interest rates have triggered a rife industry debate over asset values. In 2023, a wide bid-ask spread between buyers and sellers emerged as a result of that debate. Buyers expected a pricing correction in response to higher interest rates, while strong tenant demand allowed sellers to justify higher prices. Next year, the debate over pricing will continue. According to Deloitte’s survey, 35% of investors expect property values to worsen in 2024 and 35% of investors expect property values to improve, for a 50-50 split. The remaining 30% of investors expect pricing to remain unchanged. The lack of clarity over pricing will likely continue to drive a wide bid-ask spread and hamper investment volumes. Investors in the survey thought as much; 40% said that transaction volumes will worsen next year, while only 27% expected an improvement. This was one of the few areas where investors had a clear forecast. 

Automated valuation models (AVM) could help to bridge the gap. Using data and analytics from a host of both traditional and non-traditional metrics, AVMs deliver an unbiased third-party estimate of a property’s current value. An article from Forbes describes AVMs as using “mammoth amounts of data” to deliver an accurate and fair property value. The technology can help buyers and sellers get on the same page about property pricing and put confidence back into the transaction market. The technology can also help real estate developers better estimate property pricing during construction to create a reliable valuation proforma. 

Uncertainty has characterized—or rather plagued—the investment markets for the last year, and it seems the trend will carry on in 2024. While investors are unsure of the future, investing in automation, AI and predictive analytics can help infuse confidence back into decision-making and deliver targeted outcomes for developers. 

Discover how  the right real estate technology can help your development firm navigate an uncertain future with ease in our guide “Software Misalignment in Real Estate Development: Right Tech For The Job”.