Slow Economic Growth, Office Sector Gloom, Green Infrastructure

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Welcome to the CRE News Digest from First American Title NCS, where we explore the biggest stories in commercial real estate. As a legacy brand working in CRE for more than 120 years, First American keenly knows the market and the forces that are impacting our clients’ businesses.

Big Picture: 2024 Outlook

After a turbulent year controlled by inflation and high mortgage rates, experts are looking to the 2024 commercial real estate landscape with cautious optimism. According to PwC, lower mortgage rates going into the new year will allow for more commercial mortgage-backed securities (CMBS) to be available and investor appetite for acquiring new properties to increase; PwC describes this as a thawing in the real estate debt market.

Even with lowering inflation and mortgage rates expected in the upcoming year, Fortune predicts that it’s not enough to fully revive the CRE industry; Moody’s Analytics identified continued industry recalibration as a focus across all sectors. These projections of a “soft landing” for the U.S. economy follow previous expectations for a recession in 2024. While rapid growth and improvement are not expected within the industry, and many 2024 forecasts differ, First American Senior CRE Economist Xander Snyder predicts, “2024 will be a year of transition for CRE.”

 State of the Sector: Office

While many in CRE have entered 2024 with cautious optimism, the office sector continues to face rising vacancy rates, decreasing valuations, and the looming risk of defaulting loans. Work-from-home and hybrid work policies have proved to be long lasting, which means companies need less office space than they once did, despite many companies requiring more days in office. This declining demand has caused office vacancies to rise to an all-time high and office building valuations to plummet while interest rates remain well above pre-pandemic lows. According to Capital Economics, office building valuations still have a 20% decline ahead of them in 2024 while 10%-20% of CRE loans are projected to default.

Overall, between distressed debt, increasing vacancies, and the steady decrease in valuations, the 2024 outlook for the office sector is looking grim compared to others. As one CRE executive told Bisnow, “for retail and multifamily, it’s ‘stay alive until ’25.’ For office owners, it’s ‘take your licks until, at least, ‘26.’

Innovation: Green Buildings

In 2023, the climate crisis dominated news media. Around the globe, wildfires caused air quality issues, heavy rainfalls brought severe flooding, and major earthquakes collapsed city blocks. The US National Centers for Environmental Information reported that damages and losses from the 25 weather and climate disasters in 2023 each exceeded $1 billion, much of which came from damage to or destruction of commercial properties. These emergencies revealed the need for adaptation and mitigation within the real estate industry, placing sustainability at the forefront of projects. They’ve also contributed to higher commercial property insurance premiums. Siemens reported that only around 40% of CRE companies will achieve their environmental and decarbonization goals for 2024.

The climate crisis has forced industries to acknowledge their contributions to the problem. Many experts, including Jonathan Kaufman Iger, CEO and owner of Sage Realty, predict that 2024 will bring a focus on net zero solutions in commercial real estate. Buyers, builders, and tenants will be attracted to eco-friendly and energy-efficient infrastructure due to the sustainability of structures and the push in eco-friendly legislation.

Looking ahead, this year will likely bring sustainable adaptation to current infrastructure and mitigation to new projects as the importance of the “green building” is on the rise.

 



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