Real estate investors are preparing to buy and sell more commercial property this year than they did in 2023, but most are waiting to see what the Federal Reserve decides to do with interest rates at its meetings later this year.
The recently released 2024 U.S. Investor Intentions Survey by CBRE Group Inc. found more than 60% of respondents expect to purchase more real estate in 2024 than they did last year. That’s up from 16% of investors who responded similarly in last year’s survey.
Still, it’s unlikely there will be a massive buying spree in the coming months, or perhaps even at any point in 2024. The concern cited by most investors in the report — 87% of respondents — was higher-for-longer interest rates, a persistent worry as the U.S. labor market remains strong and inflation continues to hover around 3%. The Federal Reserve has a stated goal of reaching 2% inflation, and it’s signaled rate cuts are coming later this year.
“We’re trying to get comfortable and gain confidence that inflation is on a sustainable path down toward 2%,” Fed Chair Jerome Powell said following the bank’s meeting last week.
Darin Mellott, vice president of capital markets research at CBRE, said it’s the commercial real estate firm’s view the Fed will issue a rate cut at its May meeting, but he added many investors are waiting for the central bank to actually reduce rates before making a definitive move.
“I think a lot of people are in that camp — they want to see things materialize,” Mellott said. “The Fed has essentially put themselves in that camp — they want to see more data.”
Other top concerns for real estate investors this year, as cited in the CBRE survey, include tighter credit availability and loan terms, differing buyer and seller expectations, and an uncertain economic outlook. It illustrates how, despite interest rates being a key barometer to making more deals work, other economic conditions continue to weigh on commercial real estate investment decisions.
Not only do investors expect to buy more real estate in 2024, but a higher percentage of investors also expect to sell more commercial properties in 2024 than they did last year, despite lower property values. Forty percent of respondents to CBRE’s survey said they expect to sell more assets in 2024 than they did last year. That compares to 14% who said they expected an increase in sales last year.
Buying And Selling By Property Type
Multifamily and industrial real estate have emerged as the preferred asset classes for investment in 2024, according to the survey.
About 75% of respondents picked multifamily as a property type to invest in this year, followed by 40% who picked industrial and logistics facilities. Only 10% chose office real estate — a segment that faces the biggest challenges and threats of distress in the wake of pandemic-era changes to work.
Mellott said the preference and bias for multifamily and industrial continues to hold up despite a slowdown those sectors have experienced from their pandemic highs.
“Both property types are going to have new supply over the next couple of years that’s going to take time to work through,” Mellott said. “There’s a more favorable longer-term story for both.”
Within the broader commercial real estate investment world, there’s expected to be an increased focus on what’s termed “distressed” real estate. Roughly the same amount of investors in both 2023 and 2024 — a little more than 15% — said distressed assets and nonperforming loans were considered a preferred strategy for investment. And among perceived real estate debt opportunities this year, distressed debt was the clear winner — with 74% of investors selecting that in CBRE’s survey, followed by mezzanine financing (58%) and mortgage financing (38%).
“Distressed deals will definitely be part of the landscape in 2024,” Mellot said. “Last summer, CBRE Econometric Advisors was forecasting office owners will face a financing gap of $72.7 billion between 2023 and 2025. We anticipate some of these issues in office are going to result in pretty hefty losses. It’s nothing that would endanger the financial system as a whole, but we expect to see some smaller banks fail.”
CBRE estimated in July commercial real estate loan losses for all lenders could total up to $125 billion in the next several years, with office loans accounting for approximately $53 billion of that. For banks specifically, total commercial real estate losses are anticipated by CBRE to be about $60 billion, with $26 billion of that in office loan losses.
Multifamily is also expected to be part of the distressed real estate mix this year, though not nearly at the same level as office.
“The multifamily loans likeliest to see issues this year are ones financed in the early 2020s with floating-rate debt,” Mellott said.
Top Markets Of Interest
Not surprisingly, investors picked Sun Belt markets as the most attractive places to invest, given their continued population and job growth.
Markets like Dallas-Fort Worth, Texas; Miami and south Florida; Raleigh-Durham, North Carolina; and Nashville, Tennessee, were among the top markets picked by investors for best expected total property returns in 2024.
Notably, some gateway hubs were in the mix of markets drawing attention, including Boston, New York and Washington, D.C. But among the 10 markets viewed as most attractive for real estate investment, only one non-Sun Belt market — New York — made the list.
“I think that’s a growth story — that’s investors looking at the Sun Belt and saying, ‘We believe there is a basis for a long-term good performance of real estate fundamentals,’” Mellott said. “New York is a unique animal in a lot of ways, and investors continue to see it as a dynamic market with a lot of liquidity.”