(TND) — Expect retail space to stay in high demand, continued struggles in the office sector, and more options for those looking for an apartment.
CBRE, the world’s largest commercial real estate services and investment firm, published its annual forecast this week.
The 2024 report covers various sectors of commercial real estate, including office, retail, industrial and hotels.
“When you consider the nature of the interest rate shock that the economy’s had, the sharpest rise in interest rates in 40 years, any other time we’ve seen that in real estate it’s been cataclysm,” said Richard Barkham, CBRE global chief economist and global head of research. “But actually, you look at real estate now, and the fundamentals are OK.”
You can’t, of course, forecast the commercial real estate market without weighing the overall economy.
CBRE expects the coming year will bring slower economic growth but resilient consumer spending.
The gross domestic product – the measure of the U.S. economy and its growth – in the third quarter increased by a very strong 5.2%. Consumer spending is close to 70% of that.
And a new Commerce Department report shows retail sales rebounded last month from a lackluster October, offering renewed hope of a strong holiday shopping season.
CBRE forecasts a continued cooldown in inflation and lower interest rates.
It also forecasts unemployment rising slightly to 4.5%, up from its current 3.7%.
CBRE expects a soft landing, with a recession likely to be avoided.
Retail
There hasn’t been enough retail construction for over a decade, Barkham said.
The retail availability rate is expected to reach a record-low 4.6% due to a lack of new supply, according to CBRE. And only 14 million square feet of new multi-tenant retail space is scheduled for delivery next year, half the amount of projected demand.
“In all sectors, vacancy has gone up, but not in retail,” he said. “Vacancy has gone down actually in retail.”
Suburban centers are “incredibly vibrant at the moment,” he said.
That’s where the consumer money is, and shoppers enjoy the convenience.
Some malls are struggling, but the better malls have been able to invest in their properties and keep the right mix of exciting brands, he said.
Brick-and-mortar stores are doing fine but retailers do best when they have a “slick omnichannel” presence, allowing shoppers to fluidly meet their needs either in person or online.
But with consumer spending expected to moderate, CBRE forecasts new demand for retail space to drop to 28 million square feet from 35 million square feet this year.
Office
“The office sector is particularly challenged because of hybrid working,” Barkham said.
The pandemic accelerated the movement towards remote working that was already underway, he said.
Today, office utilization by workers is running between 50% and 65%. Before the pandemic, Barkham said it was closer to 90%.
The office sector is absorbing new inventory that was developed in the years leading into the pandemic, he said.
He also expects to see office distress and foreclosures accelerating next year.
“It’s been very difficult to get people back into the office,” Barkham said.
Amenities and quality of the office space matter more now than ever, he said.
“Commodity” office space will struggle.
Office vacancy will peak at 19.8% in 2024, according to CBRE’s forecast.
That’s up from 18.4% in the most recent quarter and 12.1% at the end of 2019.
Companies seeking blocks of office space under 20,000 square feet will account for the bulk of leasing activity, CBRE says.
Multifamily housing
Expect a wave of new supply in the coming year, according to CBRE.
There are roughly 900,000 units currently under construction, the firm said.
Rents will grow by a weaker-than-average 1.2%, and vacancy will increase above prepandemic levels, CBRE forecasts.
But there should be enough demand to keep the average occupancy rate above 94%.
Buying will remain more expensive than renting, which is likely to leave more people seeking an apartment.
Barkham said slower rent growth and more stability in the rental market should be good for everyone.
“During the 2021 period, multifamily rents were going up at 24%. That’s not good for anybody,” he said. “Multifamily rents are now going up between 1 and 2%. … That’s what we need. We don’t need rents flying away.”
Zillow says the current typical monthly rent is $1,982, up 3.3% from last year.
Other sectors
The industrial real estate sector will be active next year, according to CBRE.
The forecasted 7.5% increase in U.S. industrial production over the next five years bodes well for demand for manufacturing and distribution space, the firm says.
Urban and airport hotels will fare well, but resorts will register slower growth, according to CBRE.
Demand will continue to exceed supply for data centers. Markets such as Austin, San Antonio and Omaha should attract development due to land availability, power infrastructure and tax incentives, CBRE says.
