The Urban Land Institute and PricewaterhouseCoopers International Limited’s Commercial Property division issued its 45th edition of the annual trends report regarding the commercial real estate (CRE) industry. The national survey uses information from 2,000 CRE experts, proprietary data, and analysis of the past year and the year to come. Combining all this information, the report offers some surprising and unsurprising insights.
“The Great Reset”
The report calls the post-pandemic era “The Great Reset.” This term refers to the declining office space and downtown rentals due to companies embracing hybrid and work-from-home formats. There is no need to demolish buildings, but reinvention (likely into mixed live-work-play properties) will be necessary to reinvigorate these areas.
Southern markets did better
Higher-than-average growth may continue in Sun Belt Markets, including Houston, Dallas/Fort Worth, San Antonio, Austin, Nashville, Phoenix, Atlanta, Orlando and Las Vegas. Remote work gives employees more flexibility in where they live, and workers are gravitating to larger Sun Belt markets because they are often cheaper than their northern counterparts while still providing big city amenities.
The added challenge of high-interest rates for credit and loans will persist. Still, half the respondents believed that inflation rates would drop in 2024, and another 30% projected commercial mortgage rates would drop. However, an almost equal share expects rates to remain high in 2024.
A slow market for office space fueled the overall downward trend in CRE transactions. Moreover, there is still a substantial gap in the bid-ask spread between landlords and tenants.
The cream rises to the top
While traditional or historic properties have sagged, new and high-quality properties are projected to continue to thrive as businesses relocate to smaller or more desirable spaces.
Retail demand is up
Crime has forced some stores to close, but overall consumer brick and mortar retail growth has been surprisingly robust. Thirty-five million square feet of new retail space were added in 2023. That number is expected to rise to 45 million square feet of new retail space in 2024.
Local Houston data is similar
According to a Q3 report by local CRE marketing firm Avison Young, Houston aligns with many current and emerging trends. The metro area notably added 64,500 positions above the pre-pandemic peak, reflecting the Sun Belt’s continued economic rise. Moreover, A+ properties with a high level of amenities are attracting tenants at higher-than-average rates. Unfortunately, vacancy rates also continue to climb and commercial mortgage-backed security loans face refinancing challenges in today’s challenging capital market.
Is it time to pivot?
Shifts in the market may prompt commercial real estate investors to respond by changing their portfolios to take advantage of these trends. Those ready to make changes often rely on experienced attorneys who handle commercial real estate matters. These legal professionals can help better ensure the success of transactions, by offering strategic thinking and solutions to challenges.