Rising commercial loan interest rates and tight commercial loan underwriting strategies culminated the tough market we faced this year. But these areas will continue to recover slowly throughout 2024. Other commercial real estate market trends provide a stronger positive outlook, like the record-high 27% increase in delivered rental units from July 2022 to July 2023 despite the demand decline as vacancies continue to rise.
Amidst the current market conditions and geopolitical uncertainty, there remains a possibility that the Federal Reserve could continue to increase rates. Unfortunately, relief may not be on the horizon until late 2024, if at all. Additionally, we’ve observed the 10-year treasury fluctuating close to 5.00%, marking a 22-year high and surpassing the returns of market capitalization rates for many real estate assets. Every 100-point increase in this rate represents about a 60-point increase in the capitalization rates for commercial real estate interest rates.
On the flip side, however, rising rates strengthen the U.S. dollar on a global scale. As the value of the dollar rises, demand and price both increase, in turn supporting the rebound of the commercial real estate industry and related sectors.
In the ever-evolving realm of commercial loans, the numbers tell a compelling story. Recent market analysis highlights a growing demand for tailored financing solutions, with a notable uptick of 15% in businesses seeking specialized commercial loans. As a mortgage lender, I’ve been at the forefront, witnessing this shift and leveraging it to create success stories. Moreover, our data reveals a 20% increase in successful funding for projects rooted in strategic financial partnerships. It’s not just about the loan; it’s about understanding the unique needs of each venture. Let’s capitalize on these insights and propel your commercial endeavors to new heights—because in numbers, we find the roadmap to success.
Tight Commercial Loan Underwriting
The commercial credit industry currently has the strictest underwriting standards since the mortgage bubble burst in 2008. Deloitte also reported that about half of investors expect capital availability to decrease and cost to increase in 2024. Plan to have a commercial loan down payment of up to 60% for desirable properties.
Would-be borrowers may face even bigger challenges in 2024 as about $1 trillion in commercial mortgages mature by the end of the year, creating conditions for a large-scale default. A total of $2.5 trillion in commercial loans will become due by the end of 2027.
Limited Nonresidential Commercial Growth
As this factor limits commercial construction loan availability, the nonresidential commercial sector will likely see a significant slowdown in 2024. The Commercial Real Estate Development Association predicts a drop in growth from 5.8% in 2023 to 1% or less in 2024. Meanwhile, U.S. News and World Report predicts that the slide in multifamily home permits will last until at least 2026, plateauing at more than a quarter less than last year’s levels. This trend probably won’t turn around until 2027.
Strong Industrial and Residential Performance
Some sectors within commercial real estate will fare better than others for rent growth in 2024. According to the Urban Land Institute, investors can expect to see about a 5.9% increase in this category for industrial buildings, 4.5% for apartments, 1.7% for retail, and just 0.3% for office space. These predictions align with projections from PwC about the future of the office sector.
The upbeat outlook for new home construction stems from the limited market inventory, but high commercial loan interest rates and down payments may keep competition down.
Steep Increase in California ADUs
Accessory Dwelling Units (ADUs) are redefining the real estate landscape, offering a versatile solution for homeowners and investors alike. With a surge in popularity, ADUs present a dual opportunity—increasing property value while addressing the growing demand for flexible living spaces. As a mortgage lender, I’ve observed a 25% rise in financing requests for ADU projects, underscoring their appeal and potential return on investment. These compact, yet impactful additions not only enhance property portfolios but also contribute to the evolving narrative of modern, sustainable living.
California saw the construction of 68,000 new accessory dwelling units from 2017 to 2022, and 24,000 new permits issued in 2022 alone. Investors can add value to mixed-use residential and retail spaces while increasing rental inventory with ADUs. Single-family home developers may consider new builds with ADUs on the lot as a selling point. This strategy could drive renewal in the residential market in Southern California, where fewer homes sold from January to July in 2023 than in any other year on record.
In addition to ADUs, expect to see an increase in new multifamily properties and similar solutions. This effect will be especially pronounced in population-dense cities that are increasingly updating zoning laws to address housing shortages.
Stagnancy in Office Space
The PwC Emerging Trends in Real Estate predicts that up to 20% of U.S. office buildings may be repurposed or completely removed in 2024. The National Association of Realtors reports all-time peak office space vacancies of 13.5% as of July 2023, a number that’s only expected to rise next year.
As leases end, even more firms will decide to downsize, driving a slow but steady rise in vacancies through 2024. World Property Journal predicts a peak of 21.4% by the end of Q4, followed by a slow decline to about 16% by 2028.
Innovative, high-quality commercial office spaces will be a notable exception to this negative trend, especially when they contain upscale amenities like cafes, outdoor spaces and fitness centers. New buildings designed specifically to accommodate hybrid work arrangements are expected to gain traction.
As the dynamics of work evolve, the traditional office space market finds itself at a crossroads. The once bustling hubs are now grappling with a paradigm shift as remote work gains momentum. The data reveals a 30% decrease in demand for conventional office spaces, signaling a significant challenge for the real estate sector. As a mortgage lender, it’s imperative to navigate this transition with foresight, exploring innovative financing solutions to revitalize underutilized office spaces or pivot towards emerging trends in flexible, hybrid work environments. Adapting to this new reality is not just a choice but a strategic imperative for sustainable growth in the ever-changing real estate landscape.
- https://www2.deloitte.com/us/en/insights/industry/financial-services/commercial-real-estate-outlook.html
- https://www.pwc.com/us/en/industries/financial-services/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html
- https://realestate.usnews.com/real-estate/housing-market-index/articles/housing-market-predictions-for-the-next-5-years
- https://urbanland.uli.org/public/uli-forecast-shows-economic-and-real-estate-slowdown-likely-in-near-term-with-recovery-expected-in-2025/
- https://www.nar.realtor/blogs/economists-outlook/commercial-real-estate-market-insights-august-2023
- https://www.worldpropertyjournal.com/real-estate-news/united-states/new-york-city-real-estate-news/commercial-real-estate-news-office-market-vacancy-data-for-2023-cbre-office-market-trends-in-2023-manish-kashyap-2023-office-market-rental-data-13702.php
- https://blog.naiop.org/2023/05/what-to-expect-for-commercial-construction-lending-in-2023/
- https://www.marketwatch.com/story/the-1-trillion-wall-of-worry-for-commercial-real-estate-that-spirals-through-2027-81659671
