Both the commercial and residential markets in the US had a tipsy turvy type of year in 2023. All this makes me less than trigger happy to bark off what’s in store for the next 12 months, since multiple variables – both sociodemographic and simple economics – such as supply and demand factored into the calculus here. However, in case you don’t read the rest of this article in its entirety, here’s the spoiler alert.
Expect commercial real estate in 2024 to be much the same as it was in 2023, but at 75% full speed. Meaning, a slowdown in property appreciation and rental rates will be constrained to a few percentage points. For track and field enthusiasts, who ran 220, 330, and 440-yard splits in high school or college, the reference to 75% full speed means you’re not running at full speed, but instead at half speed (50%), or at 75% full speed. Metaphorically this works, albeit the reference to a few percentages points of appreciation makes it slightly confusing, but not really.
Who says real estate has to be boring and not Shakespearian. It’s actually poetic, for both commercial and residential, wherein both disciplines are anything but dreary, tedious and humdrum markets. They’re all vastly complicated in their own right, and are infact highly nuanced and subtle. That’s why you hear the oft sounded phrase, that all real estate is local. Think of it like weather, where in some parts of the country it can actually rain on one side of the street and not the other! There are meteorological explanations for such a phenomenon; as there also is in real estate – both commercial and residential.
As for residential real estate in 2024, and to be intentionally redundant, expect it to be much the same as it was in 2023, but at 75% full speed for most markets. In short, it’s all local. The bigger the markets, the harder they fall – and the smaller the markets, the not so hard they’ll fall, in that their rate of appreciation will be more favorable in comparison to the bigger markets. Wholistically, not many markets will have zero to negative appreciation. Which is good, since the big fuss in 2023 was if the US real estate markets – both commercial and residential, would slip into recession, which at the end of the year neither market did. Having avoided this fall into the abyss, we all woke up in the morning and everything was all right.
Residential and Commercial Interest Rates
According to some residential researchers, such as the Economic and Strategic Research (ESR) Group, they expect mortgage rates to decline in 2024, by ending the year below 6 percent threshold, per a recent Fannie Mae news piece.
As for commercial interest rates, according to a Forbes article as expressed by the Mortgage Bankers Association (MBA), “Assuming no significant economic shocks, mortgage rates are likely to continue slowly easing over the next few months, to reach a 6% to 6.5% range by spring of 2024.”
Residential Home Appreciation & Home Affordability
Keep in mind, there are 387 MSA’s in the US housing market. MSA stands for Metropolitan Statistical Area, which is a fancy and nerdy way of saying independent housing markets. This wide broadband of markets, means there are different outcomes for cities and surrounding communities that are linked by social and economic factors, with each area being delineated by its own unique factors. Once again, it’s all local.
According to Selma Hepp, CoreLogic’s chief economist. “Markets that offer more affordability and are growing in population and have job opportunities, have seen relatively more appreciation in recent months. Hence, lower cost markets (think the Midwest), are affordable and present a great opportunity for most conscientious home buyers. This is especially so, given many home buyers can work from home remotely and thus do not have to live in a large MSA. On the other side of the pendulum, that being for higher cost homes ($600,000+), the combination of high home prices, coupled with interest mortgage rates at 7%+, the outlook is bleak. This hurdle, means “affordability remains the greatest concern for homebuyers today,” according to a recent US News report.
Author: D. Sidney Potter
Commercial Real Estate Outlook
In a few words, don’t expect it to be pretty the next 12 months. Remote work has still wreaked havoc on the office sector, with a sizable portion of landlords thinking about converting half empty glass towers into apartment or condo conversions. Some landlords have let these towers fall into bankruptcy and returned them to the bank – or at least thought about it, and/or have entertained the idea of possibly converting to mixed use developments that will contain both residential and office use.
As notated in 2023, industrial is healthy as can be, and is just as giddy as a class of 1st graders on their first day of school. To be certain, 2024 looks rosy and nothing but blue skies. As for retail, that’s a mixed bunch of good and bad news.
The owners of retail shopping centers will survive, but do not expect to see occupancy rates to creep up substantially. If you could physically store goods on site via JIT (‘just in time’) inventory, a term I learned in B-school, like inventory stocked up in an industrial warehouse, then retail strip centers to big box shopping centers would have a Plan B. But that’s not the case, which means success and failure of retail will be local in nature, with those in the larger markets coping better than the smaller markets, since statutory reserve requirements are typically larger. Meaning, the big guys can survive the lean times, whilst those retail owners in smaller markets will have a tough going, given they are operating on smaller margins.
Writer D. Sidney Potter, former commercial real estate broker and tract home buyer in Southern California, writes about commercial and residential real estate.