Commercial Real Estate Trends to Track in 2024

2024 is set to be a defining year for commercial real estate (CRE) as the industry continues to transform to meet post-pandemic demands and a challenging economic market. Looking ahead, property owners and investors should expect the roller coaster experiences of recent years to persist, opening the door for creative solutions and cost-saving measures. Following are the key commercial real estate trends to watch in the new year.

CRE loans cost more — and they’re becoming harder to find

Since March 2022, rising interest rates have been challenging, particularly after relatively low rates throughout the 2010s and the all-time low rates immediately following the pandemic. The interest rate environment amplifies the challenge for commercial real estate investors who typically need to refinance every few years.

The situation is even more complex as many banks have significantly tightened their commercial lending standards in recent months. Experts anticipate the conservative approach to lending to continue in 2024, which means that, in addition to paying higher rates, loans will be more difficult for CRE investors to obtain. As a result, the commercial property sales volume is down significantly, including a 53% year-over-year drop for $1 million-plus properties in the first half of 2023.

However, as we move into the second quarter of 2024, we may see all of that change, assuming:

1. Liquidity in the marketplace stays strong, which is highly dependent on what happens with office properties and valuations
2. Interest rates are trending down and may continue to do so through 2024
3. Demographics still drive the need for more housing

Surges in construction costs drive higher property insurance premiums

The combination of inflation, labor shortages and higher costs for materials has produced historically high construction costs across the U.S. in recent years. When combined with other factors, including rising catastrophic claims, the impact on property insurance rates has been dramatic. Commercial property insurance saw average premium increases of 17% in the third quarter of 2023, according to The Council of Insurance Agents & Brokers Market Index.

Along with rising insurance premiums, construction inflation also contributes to gaps in coverage if policies are not updated to reflect current replacement costs. Construction inflation is expected to continue through 2024. While the cost of materials will begin to stabilize, labor shortages and regional demand may offset any savings.

Privatized student housing opportunities stand out in a challenging market

As average office vacancy rates continue to hover around 15% across the U.S. and rent growth for multi-family properties slows significantly from double-digit growth rates in recent years, privatized student housing offers an appealing option for commercial real estate investors. Historically, demand for student housing is relatively steady through economic downturns, and occupancy rates…