Deloitte recently published its outlook on the CRE industry for next year. Here, we’ll summarize what the survey uncovered. First, the key takeaways:
- A majority of real estate firms highlighted expense reduction as their top priority in 2024, specifically in reducing talent and office costs.
- Cost and the availability of capital were the weakest real estate market fundamentals identified, with about half of the survey respondents anticipating worsening conditions throughout 2024 — an increase from last year.
- Nearly 60% of real estate companies lack the ability to meet ESG regulations, citing a data deficit and insufficient processes and controls in place for compliance.
- Most respondents named outsourcing as their preferred strategy for driving efficiency gains. Important goals included obtaining technologies to streamline operations and build more agile, resilient business models.
- Addressing long-standing technical debt will require real estate firms to modernize legacy core technology, as many survey respondents admitted ongoing reliance on outdated infrastructure. About half report launching efforts to upgrade their capabilities.
Finding Their Footing
After enduring multiple challenges, 2024 presents an opportunity for the global real estate industry to rebuild on more solid ground. From the pandemic recovery reshaping where — and how — people work to recent geopolitical instability and ongoing financial uncertainty, many experts predict this new year will be pivotal for real estate firms to recover, strengthen and scale. Continued mixed signals about the industry’s health and direction may require real estate leaders to reposition themselves as they develop strategies for shaping the next phase of real estate investment and ownership.
Real estate firms will be reorienting themselves over the next 12 to 18 months, focusing on strategic realignments and critical realizations — perhaps far different from the traditional status quo — to find firm footing specifically in:
- Leveraging proactive property portfolio structuring and risk mitigation to establish a more efficient and sustainable business.
- Using decarbonization, green initiatives and tax incentives to create value.
- Transforming operations — and technology.
Ongoing Worry About Economic Headwinds
Global economies have weathered concerns about financial slowdowns, buffeted by the continued conflict between Russia and Ukraine, catastrophic weather events, trends in population migration, Mainland China’s weaker-than-expected economic recovery, and tightening monetary policies.
Responses from the CFOs participating in Deloitte’s survey suggest that economic concerns will strongly influence global real estate leaders’ decision-making in 2024, with 60% of North American respondents anticipating falling revenues. The two areas expected to see the most significant cuts? Talent (49%) and office space (46%).
Other concerns include high-interest rates and cost of capital. Nearly 50% also expressed concern about cyber risk, which was identified as the most likely trend impacting financial performance. This increase is likely due to the industry’s drive to incorporate more smart technology, which can leave assets more vulnerable.
Changes Across Property Markets
Deloitte’s survey showed the largest share of respondents since 2018 expecting real estate fundamentals to worsen across property sectors. For the second consecutive year, respondents expect revenue declines, more expense reduction and tighter operations. Most foresee deteriorating leasing fundamentals like vacancies, activity and rent growth over the next 12 to 18 months. Some believe the real estate markets may be nearing bottom, with the same percentage as last year anticipating worse pricing and transaction activity.
Significant annual changes were expected in capital availability — and cost of capital — with more respondents predicting a worsening cost stemming from interest rate hikes and tighter lending standards. Those tight loan standards, fewer lenders, and higher borrowing costs may make it difficult to deploy capital for purchases in 2024; property sales volumes dropped 50-63% globally in 2023.
Another looming concern? Nearly $900 billion in U.S. loans will mature over the next two years and will face challenges in obtaining refinancing, especially given the current lending environment and the fact that over 50% of maturities are with commercial mortgage-backed securities (CMBS) and collateralized loan obligation (CLO) lenders. CMBS loan delinquencies already saw a hefty 28 basis point increase in June 2023.
As economic growth sentiments weaken and property fundamentals shift, real estate investors’ top sector targets are changing, too. When asked about the most attractive risk-adjusted opportunities over the next 12 to 18 months, digital economy properties, including data centers and cell towers, topped the list.
Downtown and suburban office spaces have dropped significantly since 2022, reflecting ongoing impacts of hybrid work. Downtown office space fell from first to tenth place globally. Alternative sectors beyond the core four (industrial, multifamily, office, retail) gained ground, with build-to-rents, life sciences, senior care and single-family rentals among the top five targets. Also accelerating with the biggest YOY jump — from 14th to 8th overall — was self-storage, especially among North American respondents.
Swings in property types for 2024
This section examines the anticipated changes in different property types for this year.
Remote work has disrupted office space demand since 2020. Over the past three years, the sector has shed nearly 200 million square feet and seen an average value decline of 10%. 2023’s economic uncertainties reinforced a cautious approach to new leases, with global vacancies increasing by over 15%‚ and North America, Asia Pacific and Europe leading the way. Global office valuations declined by 4.5% — mainly in North America.
But not all things have been equal. Enter new construction designed to support hybrid work. These newer high-quality assets continue to significantly outperform, absorbing over 100 million square feet of unused space. The value gap between lower and higher-quality assets continues to widen.
As the year progresses, we may gain more clarity on realistic stabilizing office utilization rates — about 50% of pre-pandemic in the U.S. with variations influenced by housing, labor markets and commute times. Hybrid work is here to stay, influencing how we use and value offices. And after nearly three years of assessing needs and analyzing requirements, companies have more insight into required space.
About 60% of U.S. occupants believe utilization has stabilized, an increase from 43% in 2022. Most expecting further increases have the lowest current use, with 71%R anticipating they’ll reach a steady state by early 2024. Building owners should consider adaptive reuse, conversion to meet demand and regulations — or demolition if the other options aren’t cost-effective. Should fundamentals deteriorate further, office-to-residential conversion could become a viable option as early as 2027.
Boosted by e-commerce, 3PLs, and reshoring to strengthen struggling supply chains, sustained demand for industrial space remains high despite limited availability. Pandemic consumer spending drove record warehouse and manufacturing demand. 2021 absorption doubled the 2015-2019 average, and 2022 exceeded it by more than 60%. Record construction has helped to meet demand in 2023, but some markets still have sub-1% vacancies, hindering supply. Expect rent growth to continue at high YOY rates, including 18.6% in North America and 10.8% in Europe.
That record construction pipeline hopes to address the significant supply/demand imbalance, aided by incentives like the CHIPS and Inflation Reduction Acts. Other helpful actions include the industry’s transition to new technologies and nearshoring supply chains.
However, The construction boom faces several threats, including a lack of available land — megasites — of 1000+ acres with transit access and a local, skilled labor pool. Also needed? A robust energy infrastructure to support those facilities. The challenge with megasites is they’re custom-designed for single occupants and require shovel-ready sites, but fewer than 24 remain in the U.S. Land is becoming even more scarce for energy-intensive facilities like chip plants, and finding the appropriate conditions for new megasites is becoming more challenging, causing costly delays that contribute to higher rents.
The real estate industry has a significant uphill climb for 2024, but its leaders have the tools to establish a solid base for long-term success. The Deloitte report enumerates more of those challenges and approaches to take. Treating the shifts as foundational realities could give real estate firms the stable footing they need to build for the future.
Are you a commercial real estate investor or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United: an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.