What the Recovery Could Look Like Next Year

Article originally posted on Globe St. on December 7, 2023

The good news for 2024 in U.S. commercial real estate according to Colliers is the chance to adjust to a new market reality, including a more stable interest rate environment, and some appealing investment opportunities.

The bad news is some of the same, because anyone pining for the heady days of zero interest rate policy and frothy markets is going to be seriously disappointed.

Start with a pithy assessment of the new market reality by David Amsterdam, president of U.S. capital markets and Northeast region. “Activity levels in 2021-2022 were unsustainable and are unlikely to return in the near term,” he wrote. “Market recovery will be a drawn-out process. It’s worth noting that it took a decade for sales volumes to recover after the Global Financial Crisis, even when interest rates were favorable and investors were chasing yield. In the current environment, factoring in competition, investment strategies will have to be more selective and tactical.”

There will be more stability, especially in interest rates. Markets have been assuming that the Federal Reserve was ready to begin unwinding the hikes. But the “Fed has continued to broadcast that rates will be ‘higher for longer’ and has scaled back expectations for cuts next year.” It currently looks as though expectations are still pushing downward with the yield on the 10-year Treasury still testing lower levels. However, the September 2023 (most recent) Federal Reserve economic projections still show a core personal consumption expenditures inflation of 2.6% in 2024 and not dropping to the magic 2.0% figure until 2026. “These moves suggest that owners waiting for lower rates before selling may opt to come to market in a more timely manner.” That could mean more activity and, as a result, better price discovery.

Part of the new reality is that higher rates have made other income-producing assets more competitive with real estate. If Treasury yields continue their downward movement, that might become less important. However, so long as investors can get strong risk-free returns, there’s little motivation for them to take risks, like CRE financing.

“A superior level of individual market-based due diligence and asset-level performance will become more important than in recent years, when low interest rates, competitive capital flows, and cap rate compression lifted the market overall,” Amsterdam wrote.

Some areas he pointed to as having some promise include industrial (more coming to market that will open opportunities), multifamily (likely to remain in favor even as new inventory in some markets could have an impact on conditions), and a tentative return to office (pricing resents in some gateway cities will be tempting and new value-add strategies are likely to emerge).