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    Top 10 Predictions for Commercial Real Estate in 2024

    The past couple of years have brought about unprecedented conditions in commercial real estate, and it may feel difficult to predict what’s coming next in the market. Economic conditions may be less certain than ever before, but tracking trends and opportunities is still a valuable practice for your firm moving into 2024 and beyond. As the industry continues to contend with macroeconomic turbulence and an ever-evolving post-pandemic environment, you’ll find both opportunities and challenges in the years ahead. You’ll want to be aware of upcoming trends across sectors and asset classes, as well as the strategies top firms are using to stay competitive amid challenges. 

    Here are the top 10 trends, challenges, and opportunities you can expect to see in the industry’s future: 

    1. Expense Mitigation Remains a Top Priority 

    High interest rates, supply-chain disruptions, and labor shortages have contributed to rising costs at nearly every stage of the development process. As a result, expense mitigation will remain a top priority for development firms moving into 2024 and beyond. Deloitte’s 2024 commercial real estate outlook survey found that expense mitigation remains a top priority for development firms moving into the next year. 40% of real estate CFOs participating in the survey planned to reduce costs in 2024, with the primary areas of cost reduction expected to be talent and office space. Expense mitigation can also come from offsetting costs; sustainable materials and practices often require a greater investment upfront but can have long-term benefits. For multifamily developers working on complex projects, pursuing economies of scale, or buying construction materials and building fixtures in bulk, can also help lower costs. 

    2. Capital Markets Will Make a Slow Recovery 

    The  outlook for capital markets in 2024 has stabilized in recent months, and global economic growth has proved more resilient than anticipated at the start of 2023. US banking activity is looking relatively stable heading into 2024, seeming to support the Federal Reserve's aggressive interest rate hikes as an effort to curb inflation. Investors are likely to remain timid moving into the next year, waiting to see how the economy and market react to a higher-for-longer interest rate environment. Real estate development deal activity will be more likely to pick up once it becomes clear whether or not the Federal Reserve deems additional interest rate hikes necessary and it’s clear the economy is stable. 

    3. Deployment May Be Troubled in 2024 

    Commercial real estate buyers may have more difficulty deploying capital for purchases in 2024 amid tightening loan standards, fewer lenders, and higher borrowing costs. If you’re looking to take a conservative approach in the near future you can consider alternative capital sources such as mezzanine and preferred debt, as a means to balance rent growth with tenant relationship management. In addition, many alternative funding sources, such as government grants and tax incentives, can help offset deployment costs. 

    4. Class A Office Space Will Win Out

    Class A office space, with health and wellness options, social spaces, and hospitality features, will continue to win out as remote work remains dominant. Workers are requiring additional incentives to go into the office, and want the workplace to be a destination spot, instead of somewhere they are required to be. The trend even extends to co-working space, with exclusive coworking clubs continuing to thrive as shared Class B and Class C co-working space struggles. The future of shared workspace is exclusive co-working clubs and tie-ins with mixed-use developments. The office market may be going through a turbulent transition, but spaces that offer additional value to workers will be positioned to succeed. 

    5. Environmental, Social, and Governance (ESG) Considerations Pose Opportunities and Challenges 

    Leaders in real estate will need to include more comprehensive environmental, social, and governance (ESG) metrics in corporate reporting to demonstrate sustainability efforts and comply with state and federal regulations. Firms will need to develop the data, processes, and internal controls necessary to gather data and report metrics, such as IoT technology to control and track consumption. Doing so will help your team monitor energy use, manage waste, and use resources more efficiently in measurable ways. You can expect this capability to prove even more vital as the asset and wealth management industry sees ESG as a smart and necessary long-term investment. 

    Expect to see development firms ramping up sustainability efforts at every stage of the development lifecycle.  For example, LEED certification and other initiatives are helping green multifamily construction, with renewable energy such as solar panels, wind turbines, geothermal heating, and cooling helping decarbonize buildings. Sustainable building materials are replacing old standards in construction more broadly, in many cases lowering vendor costs and boosting a project’s overall resiliency. 

    Developers are more likely to view  sustainability as a financial opportunity moving forward. Buildings that lower carbon emissions, prioritize occupant health or well-being, and are resilient to climate emergencies will provide greater returns in the long term. In addition, these assets are cheaper to operate and maintain, as well as strengthen your business’ ESG records. You’ll also bolster your business’s reputation on the community level, showing your commitment to positive environmental, economic, and public health outcomes. This can be a key to securing stakeholder buy-in on future projects and efforts in the community. 

    [Guide] Unlock strategies your firm can use to navigate common development  challenges - such as overworked project teams, economic headwinds, or changes  in government regulations - without sacrificing project timelines or budget.

    6. Retail Demand Shows Unexpected Resilience  

    Retail tenant demand has maintained momentum as the industry continues to evolve and larger retailers consolidate in high-demand locations. Even though several prominent retailers filed for bankruptcy over the last year, such as Bed Bath & Beyond and Rite Aid, demand remains high and landlords are optimistic about filling vacancies and pushing rents higher. The industry adapted and survived the pandemic, leading to stronger business models overall, but slow leasing has also kept the market tight and resulted in a favorable balance of supply and demand. The future of in-store retail will belong to businesses that lean into e-commerce offerings, ensuring physical locations have digital capabilities. 

    7. Industrial and Life Sciences Sectors Begin to Slow 

    Life sciences and industrial sectors experienced a boost during the pandemic, but are now beginning to slow and see demand level out. Pandemic-era demand for consumer goods boosted warehousing and manufacturing construction, and to meet this demand, a record amount of new units are expected to be completed by the end of 2023. However, as pandemic-era demand cools and inflation stems consumer spending, developers can expect to see growth in the sector slow as well. Land-use challenges for warehouse and manufacturing sites, in which developers must find large plots of land with access to energy infrastructure and a skilled workforce, have also presented challenges for completing industrial projects. 

    The outlook for life science sectors may be similarly limited in the near future. Key life sciences markets, such as Boston and Cambridge, Massachusetts, have seen a rise in sublease listings and vacancies amid an influx of supply. Life science companies have also faced new challenges amid increased competition, shifting regulations, and new demands from providers as well as patients. Layoffs in the industry resulted in real estate downsizing and resulted in an overall decrease in rents. Momentum for life sciences development slowed nationally in 2023, though the market is still expected to experience long-term growth, just perhaps not at the same breakneck pace. 

    8. Multifamily Faces a Mixed Outlook 

    The multifamily sector has long been considered reliable among developers and investors alike, as housing demand usually remains consistent regardless of the market’s cycles. However, strong multifamily development fundamentals have been complicated by current economic turbulence, leading to a mixed outlook for the asset class. Market fundamentals have remained strong over the last year, stabilized by strong demand amid housing shortages and healthy occupancies. Looking toward 2024 and beyond, dislocated markets, supply-chain shortages, and difficulties getting project approval may bring new difficulties. High expenses are chipping away at net operating income, and this, along with tight financing terms and an influx of new supply, may cause turbulence for this historically low-risk asset class. 

    9. Sunbelt Markets Continue to Grow 

    Sunbelt cities such as Phoenix, Houston, Dallas, Austin, and Atlanta all made the 2020 Census Top 10 metropolitan areas for population growth, and since then, these markets have only continued to grow. Even though mortgage and living costs are catching up to high-demand coastal cities, many residents are seeking these areas out to get more space for their money. The pandemic bolstered this trend, and sunbelt cities captured most of the country’s population growth over the past several years. Investors are likely to continue to favor the sun belt market as a result, with multifamily transactions in the region leading the country in investment sales. 

    10. Competitive CRE Firms Leverage Technology to Ensure Successful Projects 

    Most competitive real estate firms use technology to streamline operations and add resilience and agility to operations. Top real estate firms are leveraging technology to reduce time-consuming and repetitive administrative tasks and eliminate errors from unreliable and outdated spreadsheets. By freeing up internal teams to focus on core service offerings and decision-making, firms gain a competitive advantage. As expense mitigation efforts require teams to operate with less staff, data automation can help keep deals on track and increase margins on projects. In addition, modern real estate development software helps firms model budgets accurately and generate accurate cost reports for stakeholders. 

    Learn More About Northspyre 

    Northspyre is a leading real estate command center, designed using automation to reduce manual data entry, increase productivity, and maximize your returns from pre-development to stabilization. The cloud-based platform allows you to organize your valuable project data into detailed dashboards using our powerful search feature, indexing all contracts, proposals, change orders, lien waivers, and more. The platform is created to cater to development teams of all shapes and sizes, increasing efficiency by up to 80% and reducing project overruns by up to 66%. 

    Download our white paper A Guide to Overcoming Real Estate Development’s Greatest Obstacles to learn how your team can achieve predictable and profitable outcomes amid any market conditions.

    A Guide to Overcoming Real Estate’s Greatest Obstacles

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