Commercial Real Estate Market Report: Q1 2024

It is a new year and a new name for our signature commercial real estate market report, which we are rebranding as REcap. The report will continue to feature similar content as in the past, with an updated look and feel for 2024 and beyond that we hope you enjoy.

As the U.S. presidential campaign begins to ramp up and global political unease appears to be increasing, the U.S. economy seems more than resilient. Merger and acquisition (M&A) activity rebounded somewhat in the first quarter, and equity markets have continued their strong growth from the prior year while most await the assumed Fed reduction in rates later this year. There is a significant risk that markets are baking in too much optimism and could be set up for a significant correction if things do not go as hoped, but for now optimism for the future is evident.

Looking specifically at commercial real estate, the dynamics are a bit different as a challenging interest rate environment continues to weigh on markets. Debt concerns continue to be a primary theme in the first quarter of the year, most notably looming maturities. Several large transactions were also announced, with more prognosticators optimistic for more transaction volume in 2024 both at the property level and fueled by entity deals.

Key takeaways

• Multifamily housing: The multifamily sector has continued to outperform most of the real estate markets in terms of transaction volume as investors continue to execute deals despite capital markets and operational headwinds. Vacancies have continued their slow climb and will likely increase with new supply coming online in 2024, which are expected to be the highest amount in decades.
• Office: The office sector's instability persists since COVID-19, but signs of a pending recovery emerge between hurdles in the near term. Increased office foot traffic, notably in the real estate, finance and insurance sectors, signals a shift towards in-person work. High national vacancy rates persist, yet some regions have shown signs of positive net absorption.
• Retail: Continued strong employment figures and resilient consumer spending are powering strong fundamentals for the retail sector as a whole. Market participants continue to creatively redevelop obsolete properties and fine-tune business models to adjust to consumer demands and create value.
• Industrial: The industrial market is cooling as the glut of new supply constricted net absorption levels in the first quarter. However, the current easing of new construction starts paired with constant demand for industrial space will likely cause vacancies to tighten over the coming years while rent growth will resume its upward march.
• Capital markets: REIT’s had positive returns in 2023 but were mixed to start 2024, lagging the broader equity markets and reflective of the headwinds facing commercial real estate in the current capital markets environment. Some would have hoped for rosier inflation numbers and Fed rate cuts by now, but it has been apparent for some time that any reduction in rates and resultant decrease in borrowing costs is going to happen at a deliberate pace.

For further analysis of the third quarter, download our latest report.

For more information on this topic, or to learn how Baker Tilly specialists can help with your real estate needs, contact our team.