Despite volatility and uncertainty, real estate investors are finding ways to make deals. A new consensus is forming around a “reset” in the economy and commercial real estate, according to the 2024 Emerging Trends in Real Estate forecast produced by PwC and ULI.
“There’s this sentiment of guarded optimism,” says Bill Staffieri, partner with PwC. He presented the forecast to hundreds of real estate experts at the Real Estate Outlook 2024, hosted in late January in New York City by ULI New York.
The U.S. economy is likely to avoid an economic recession in the immediate future, according to experts at the event. Interest rates will stay high—though not as high as in 2023. Debt financing will still be hard to find—though not as hard as in 2023. And many owners of distressed properties, such as office buildings, will be forced to sell or let banks seize their properties in a “painful but needed capitulation,” Staffieri says, based upon consensus in the Emerging Trends forecast.
Despite difficulties, dealmakers are “itching to buy” commercial real estate, says Staffieri. He was joined at the New York City event by expert panelists familiar with the local market.
“Transaction activity will be low this year—but maybe not as low as last year,” says Sonny Kalsi, co-CEO for BentallGreenOak. “When interest rates go down this year, there should be more credit available in the real estate space.”
Experts including Kalsi are no longer complaining about high interest rates. Instead, they are wrestling with how to pivot their investment portfolios. “We’ve handed the keys back on a couple of assets in New York,” Kalsi says. That tough decision will allow BentallGreenOak to focus its resources on opportunities in 2024.
“Getting to closing is not fun,” says David Dishy, CEO of developer LMXD. “But as 2023 is behind us, folks now have some clarity on rates and cost.”
Survey says …
The 2024 forecast, now in its 45th edition, is based on more than 1,200 surveys and more than 600 interviews with leading real estate industry experts. PwC started these interviews in July 2023 and completed the last interviews in October.
“Even in that short period of time, people’s views of what the market was going to look like going forward changed pretty significantly,” Staffieri says. “It’s very volatile.”
For a full breakdown of the trends in the ULI PwC forecast, read our story in Urban Land.
That volatile, changing consensus now forecasts … less change in 2024. In particular, interest rates are likely to stay higher for longer than experts expected a year ago. That means the pace of investment in real estate is likely to stay slower for longer than expected, Staffieri says.
“Unbuckle your seatbelts because it’s probably going to be a slow, careful ride,” says one leading real estate investor interviewed for the forecast. “You’re just going to have to do your homework when it comes to specific details and specific places and specific property types.”
Interest rates started rising in March 2022, as the Federal Reserve raised benchmark interest rates to fight inflation. That kind of Fed action can cause a sudden, deep recession. A swift economic recovery usually comes next as federal officials cut their benchmark interest rates back down to size.
“We’ve been talking about a recession for 18-plus months,” Staffieri says. But the U.S. economy has continued to grow as price inflation has finally begun to slow. “There’s a general consensus that we are headed for a soft landing.”
Without a recession, the Fed has no motive to deeply cut interest rates. Long-term interest rates have dropped around a hundred basis points since the surveys and interviews for PwC’s Outlook were completed in late 2023. But these rates are still much higher than investors got used to in recent years. Few now expect rock-bottom low interest rates to return.
“It doesn’t bode very well for commercial real estate,” Staffieri says.
Rebalancing act
A strong economy is helping at least some types of real estate.
“There’s a real cause for optimism,” says EB Kelly, senior managing director and head of Rockefeller Center for Tishman Speyer. Although the weekday number of office workers in New York’s Midtown district is now a little more than half what that number was before the pandemic, the number of tourists has now fully recovered. That helps the whole Rockefeller Center complex, including the office space, says Kelly. “I think, especially for our central business districts, we should spend a little less time counting briefcases and a little more time counting fanny packs and backpacks.”
“The world is resetting,” Dishy says. “Given that, and that demand remains strong, particularly on the residential side, we will get through it.”
Panelists addressed efforts to convert outdated office properties into new apartment properties—which is more expensive and difficult than many realize. However, many older office buildings in Lower Manhattan have already made the change. “I think it would surprise someone from Nebraska to know that most of Wall Street is now residential,” says Vishaan Chakrabarti, founder and creative director of Practice for Architecture and Urbanism.
Environmental concerns such as flooding, wildfires, and hurricanes are still affecting the decisions made by real estate investors, according to the forecast. “Florida dropped off the list for the first time in a long time as one of the top 10 markets,” says Ricardo Ruiz, a partner with PwC. “It’s just cost prohibitive at this point … trying to maintain the insurance costs associated with investing in real property.”
Environmental worries are also making a difference in New York. Many New York developers now ignore sites located in places vulnerable to 100-year flood events, says Heather McGeory, head of sustainability for venture capital firm Fifth Wall. “I always look at the flood maps, and I encourage everyone here to do that, too,” she says.
