Brighter days could be coming for the commercial real estate industry after a cooldown in recent years.
Private real estate investment funds remain highly attractive to investors globally, with 39% of them intending to put more money into private real estate this year compared with last year, according to PERE, an investment publication site.
The Federal Reserve could cut interest rates in 2024, making financing more affordable and boosting real estate development. If this happens, the lower cost of borrowing could also juice the broader economy, in turn driving up business expansions and demand for commercial properties.
At Goodwin’s RECM conference on March 27, which we co-host with Columbia Business School, real estate thought leaders will offer insights on some of the forces set to spur growth in real estate this year and beyond.
Here is a breakdown of some of the pressing real estate trends we’re thinking about as we approach our conference.
Real Estate Firms Embrace AI
Chief among the growth drivers is AI, particularly given the proliferation of generative AI (gen AI) tools, the need for infrastructure and real estate to support the expansion of AI, and the increased provision of meaningful data analytics.
Real estate firms are far more likely to spend money on AI than on other emerging technologies, according to a 2024 Deloitte survey of global real estate leaders. Seventy-two percent of survey respondents said their firms are piloting, starting to implement, or producing with AI. By comparison, just more than half of firms said they are investing in the metaverse.
Gen AI could produce $110 billion to $180 billion or more in annual value for the global real estate industry, according to estimates from consulting firm McKinsey. Real estate companies and investors are seeking to tap the power of gen AI to drastically speed up investment decisions, enable prospective tenants to visualize themselves in a property, and improve customer service.
Investors Can Seize on the Fast-Growing Operational Real Estate Sector
Operational real estate (OpRE), or real estate investment in which management and operational performance directly affect returns, continues to rapidly expand. OpRE investors might manage hotel, hospital, or senior-living facilities, with investment returns tied to property operations. The financial returns of investing in senior-care homes, for instance, would depend on the quality of care provided.
Many OpRE investments, such as healthcare facilities, are expected to remain strong regardless of how the economy fares because they provide services that are always needed. Some will also benefit from long-running demographic trends. An aging US population will keep demand for senior-housing services growing, for instance, irrespective of the economy’s ups and downs.
OpRE investors may turn to renewables as environmental, social, and governance initiatives remain an industry priority. Hotels, for instance, can increasingly use renewable energy to appeal to environmentally conscious guests and aid the transition to a low-carbon economy.
More Offices to Undergo Conversions
Remote work remains far more common than before the pandemic hit four years ago. Perhaps more surprisingly, work-from-home time is down only slightly from two years ago, when the pandemic was still disrupting back-to-office plans, according to survey findings from Stanford University Professor Nicholas Bloom and co-researchers.
The shift to remote and hybrid work has driven up office vacancy rates while creating new opportunities for cities to reshape downtowns. Many older buildings without modern facilities will likely convert into apartment buildings or condos, according to CBRE, a commercial real estate investment firm. The federal government is aiming to boost such office-to-residential conversions through grants, low-interest loans, and tax incentives.
More office-to-residential conversions in downtown office districts will help offset some of the drag from office vacancies. Momentum is already building. CBRE expected about 100 offices in major US cities would convert into other types of spaces by the end of 2023, up from 56 office conversions in 2022. Nearly half of last year’s projected office conversions were to multifamily projects.
Vacant office buildings also provide an investment opportunity. Value-added funds can acquire empty offices and renovate them to increase their leasing value, according to investment data company Preqin.
Retail Remains Resilient
American shoppers returned in earnest to stores and restaurants as the pandemic eased. Meanwhile, the availability of retail space remained limited, reflecting a dearth of new construction following the 2008–09 recession.
Solid demand combined with a lack of supply helped drive down retail vacancy rates, keeping the sector strong over the past year despite higher interest rates. The US shopping center vacancy rate hit 5.3% in the fourth quarter of last year, the lowest for records tracing back to 2007, according to Cushman & Wakefield Research.
The outlook for retail remains bright, particularly for neighborhood shops and suburban shopping centers, which are benefiting from the shift to remote work. More consumers are making trips to stores near their homes during the workweek.
Commercial Real Estate Market Defies the Odds
Last spring’s series of bank failures triggered some analyst projections for an imminent commercial real estate bust. Such a crisis never materialized—and might not.
In one sign that financial stress remains minimal, the delinquency rate—or the share of commercial loans that are past due—is still historically low, despite ticking up last year. The low delinquency rate aligns with other signs of economic strength, including a low unemployment rate and stronger-than-expected growth in gross domestic product.
Though some regional banks will still face challenges as their maturing loans come due, several factors could help alleviate bank risks, including strong rent growth, lower rates of new construction, and less leveraged lending, according to an analysis from Moody’s Analytics. Further, commercial real estate is a diverse market, with some sectors, such as retail, thriving.
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