10 Themes From ‘Emerging Trends in Real Estate’ Report Shaping 2024

Acceptance, recognition, acquiescence.

More than others, these terms encapsulate the tone among real estate professionals in the 2024 edition of “Emerging Trends in Real Estate" published jointly by the Urban Land Institute and PwC.

Through interviews, surveys and focus groups with real estate developers, advisors, private-equity investors and private property owners, the study evaluates the market conditions, challenges and opportunities for investors in the year ahead.

The study notes that “after three years of holding out hope, the CRE community has now accepted that the industry will not return to pre-pandemic times and that the world we’re looking at now is the world we’ll be living in for a while.”

Respondents indicated that interest rates are expected to remain at roughly the same levels for the foreseeable future, and with some exceptions, construction costs will continue to rise. The study notes that professionals “believe the worst of inflation is behind us, with over half expecting inflation to decline in 2024 and another third believing inflation will at least stabilize.” However, just “three in 10 survey respondents expect commercial mortgage rates to drop in the coming year.”

One surprising result from the survey is that “investors are eager to acquire new assets,” the study said, adding that “the Emerging Trends Barometer for 2024 registered its highest 'buy' rating since 2010, likely reflecting recent and expected price declines, making this a more favorable entry point for acquisitions after a decade of relentless appreciation.”

The following is a summary of the 10 key themes outlined in the report.

The threat of recession was top-of-mind for most CRE professionals throughout 2023. The study noted “we’ve all been waiting a long time for a recession to start, but the U.S. economy refuses to give in.” The expectation now is that “the economy is headed for a ‘soft landing’ or a ‘growth recession’ where we have a relatively strong labor market and decent job growth, but we have interest rates that are pushing us to a slowdown,” said a senior executive of a CRE advisory firm quoted in the study.

However, the importance of distinguishing between the overall economy and what’s happening in real estate was noted in the report. “The upbeat assessment of avoiding a recession has some dark clouds for the real estate industry because it means that we have a longer period of higher interest rates than previously projected.”

The report notes that conditions to watch throughout 2024 that could reduce consumer and business spending include a household savings rates below normal levels, resumption of student loan payments, and tightening lending standards. Oil price increases that could reignite inflation, and black swan events like the recent terrorist attacks in Israel, could bring further distress.

Following the Great Financial Crisis, for roughly 15 years, commercial real estate assets generated unusually strong returns via robust rent growth, declining cap rates and rising property values, the study said. But the Fed “spoiled CRE’s long run of historically strong performance with the first of 11 rate hikes in March 2022, and markets are not expected to return to their former glory anytime soon.”

As the reality of sustained higher rates sunk in throughout 2023, in preparation for the future, market participants are recalibrating their expectations “to reflect diminished drivers in the coming years to the detriment of rent growth, property values and returns.”

The head of an asset management firm quoted in the study said, “Right now, I think that most investors are anchored to what transpired over the last 13 or 14 years with zero interest rates. Everybody’s anchoring to the old days, and until they adjust to the new rates,” buyers and sellers will not transact.

On the bright side, the study noted that while the “office sector has an outsized impact on the perceived risks and opportunities in commercial real estate, fundamentals in most [other] sectors are still generally strong, and distress is low.”

After three years of hoping for a turnaround, survey participants have surrendered to the notion that demand for office space is forever changed. “There is no longer any reasonable expectation of a full office market recovery back to pre-pandemic levels,” noted the study.

The office sector is now in the throes of a thorough reconsideration of its purpose and role, but after much hype about office to residential conversions, market participants are aware that “broad-brush conclusions should be resisted.”

But according to the study, the retail sector may serve as a guiding light. For about 10 years, due largely to e-commerce and the pandemic, the retail sector underwent a significant repositioning. Today, office investors are looking at retail properties to learn how owners successfully navigated that sector’s evolution.

Interest rate increases that are upending the CRE industry are also weighing on various sectors of the economy — from governments to businesses to consumers. Debt has “increased to record levels, but household and corporate debt burdens seem to be under control relative to historical benchmarks and delinquency rates remain low,” the study said.

“However, CRE capital has become scarce and expensive. While distress levels remain low, a liquidity crisis looms as many owners of underperforming buildings face debt deadlines and will be unable to refinance their projects, prompting either defaults or distressed asset sales,” according to the study.

“Thus far, delinquency and default rates remain at healthy levels … although we can expect [delinquency] rates to rise significantly, particularly in the office and multifamily sectors, as major leases expire, and mortgages come due,” predicted the study.

Capital availability was cited as the second most important issue for real estate in 2024 in the survey, topped only by “interest rates and cost of capital.”

In previous Emerging Trends surveys, insurance was a footnote in discussions about climate. This year, insurance is at the center of the climate discussion in the study. “Historically, insurance has been only a minor concern for commercial property owners, accounting for about 3% of rent,” noted the study. “But a recent spike in costs is forcing owners to pay attention.”

They are concerned that “at some point, tenants [paying their share of a building’s insurance expense] will balk at the costs” or that the expense will eat into returns, the study said.

What’s worse is that insurance availability is dwindling. Major institutional investors generally secure insurance across their portfolio, so they may not worry about obtaining insurance for a particular property. But one investment executive said, “If you’re a smaller buyer, and you’re buying in one of these high-risk areas, like Houston or South Florida, the seller is going to be concerned about whether you’re going to be able to secure the insurance,” to obtain a loan.

“The net–net of higher insurance costs is probably less new supply of housing or industrial space and higher rents,” said a property investor, adding "that’s because these two property types are more likely than other major property sectors to be located on high-risk sites, such as along the coastline or near forests."

“Housing affordability is the critical issue in real estate,” said a leading real estate academic, referring specifically to for-sale housing. Respondents to the survey seem to agree, overwhelmingly citing “housing costs and availability” as the most critical social/political issue this year.

The United States experienced the fastest-ever deterioration in housing affordability over the past three years with a 30% jump in the median price of existing homes sold from 2020 to 2022, based on NAR data cited in the study.

Next “came the historic mortgage rate shock” as the Fed drove up interest rates, “ultimately leading to a 150% surge in mortgage interest rates (from 3.0% to 7.7%),” the study noted. It added that “in August 2023, the median home price was about $407,000, or more than a third higher than a typical household could afford.”

Recently, the situation for renters has been more favorable. “Rent growth nationally is flat or minimal, depending on the source, after peaking at over 15% year-over-year in early 2022, due largely to more units added to the market.”

This is bringing relief for renters, but angst for some multifamily investors. Another million multifamily units are scheduled to be completed through 2025, which should put additional downward pressure on rents in select markets.

Survey respondents indicated that in 2024 multifamily and single-family housing will be the top prospects for investment in the United States.

“Recent shifts in both property and financial markets are upending long-established norms about how CRE portfolios should be constructed, including the definition of ‘core’ assets,” noted the study, adding that “with downtown offices and regional malls — the traditional pillars of CRE portfolios — both suffering existential declines in tenant demand and property values, fund managers must find replacement investments.”

To this end, many are considering a range of “newer product types previously viewed as niche but currently offering more compelling returns,” the study said, with most of these sectors representing “extensions of more conventional ones.” An asset management firm leader stated, “the definition of core industrial is expanding to include cold storage and self-storage, while core multifamily includes student housing and single-family rental.”

“Indeed, the five highest-rated sectors in the Emerging Trends 2024 survey are all specialized subsector segments, such as data centers and moderate-income/workforce apartments,” noted the study.

Core investors are even willing to consider conventional office buildings, but not in the same way as before. “I think office gets rethought in terms of what’s core, perhaps less by geography like urban or CBD [central business district] and more by age and stage or by capital intensity,” said one asset manager.

“The shift to remote work might be the single most important trend for property market dynamics in generations, as impactful for the office sector as e-commerce has been for the retail and industrial sectors, but with other far-reaching impacts on our lives and property markets,” said the study.

The prevalence of remote work in the United States has almost tripled relative to pre-pandemic trends, rising from 5.7% of all workers in 2019 to 15.2% in 2022 according to new data from the U.S. Census Bureau’s 2022 American Community Survey, cited in the study. This shift has been far more pronounced in large cities and in office-inclined jobs, to the detriment of the nation’s office sector and downtowns.

“Remote and hybrid workers are more willing to relocate than other workers, typically moving to less-dense suburbs and smaller cities, often in search of more affordable housing. This trend is especially strong among younger households under age 35, normally the likely urban dwellers,” noted the study.

Urban economists and city leaders are debating the future of downtowns given that it may involve significantly fewer occupied office buildings, the study noted, adding that “pessimists fear an 'urban doom loop,' while optimists counter that cities will adapt to the new adversities as they always have managed to in the past.”

The term “urban doom loop” describes “the downward spiral that could follow the decline in foot traffic when offices sit empty. Nearby stores and services close, diminishing the allure for residents and reducing property values," the study noted, adding that tax revenues decline, forcing cities to cut critical services, further reducing the community’s appeal to commercial and residential users. Transit systems suffer as ridership declines, requiring service cutbacks, so even fewer commuters ride the buses and trains.

A more hopeful perspective focuses on the traditional strengths of cities to attract young, highly adaptable people. “The dynamics that made urban centers attractive to a huge percentage of the population exist today and will persist into the future,” said a leading housing sector consultant. “I don't want to live in the woods, even if I’m not going to the office.”

“Despite the hype and popular attention on artificial intelligence, actual CRE uses appear to be limited and most are mundane to date,” noted the study, with a developer that leases to many tech firms adding, “there are ways we can’t even fathom that will be helpful in all businesses. But the one I’ve heard of more recently is administrative tasks. It basically serves as your superpower assistant.”

Nonetheless, industry uses “are likely to expand quickly, given the promise of the technology and the volume of venture capital investment going into the sector,” the study noted, adding that potential applications include “probabilistic models to help predict property climate risks, identify investment opportunities and construct higher-performing portfolios.”

Commenting on potential jobs losses, the study said, “AI adoption could replace many types of routine white-collar work, but jobs losses could be offset by greater overall economic growth as well as space demand from AI firms."