As we enter 2024, there are broad expectations for improvement in economic conditions despite ongoing fluctuations in various market indicators. Market sentiment indicates that interest rates have likely peaked, and adjustments downward are already priced into the markets for the coming year.
The Federal Reserve is expected to gradually lower short-term interest rates to approximately 4.25% by the end of 2024 and to 3.5% in 2025. This reduction pace will be slower compared to previous rate-cutting cycles, reflecting the robustness of the U.S. economy. Although the path to market recovery may differ in speed and consistency across various sectors, restoring predictability will be essential for stabilizing valuations and increasing liquidity, fostering a more balanced market environment. Economic growth is forecasted to remain below both trend and historical rates. However, with further easing of inflation and reductions in policy rates, the latter part of the year holds promise for a stronger performance, with inflation expected to decrease to around 2.7% by 2025.
While inflation eases, the U.S. economy will confront certain challenges in early 2024, particularly from relatively high interest rates. However, resilience will be seen in strong consumer financial positions, and wage growth is anticipated to surpass inflation through at least the first half of 2024. Consequently, expenditure on services like healthcare, leisure, and hospitality will inject vitality and contribute to some job growth. There’s a heightened probability that the U.S. will avoid a recession and achieve a soft landing in 2024. Although an economic slowdown is anticipated and downside risks remain elevated, the unemployment rate is projected to rise to only around 4.5%, which is unlikely to significantly weaken real estate fundamentals except in the office sector.
Office space
The increase in office vacancies to a historic highs in the 16% range in 2023 was driven by stagnant attendance and pushback on return-to-work strategies, leading to heightened concerns despite a slight relief in immediate recession fears. Although there’s a growing trend toward enforcing onsite work requirements, the forecast is bleak for the coming year.
Throughout 2023, data from various sources including transit services, tech platforms, and surveys indicated minimal change in office attendance, with knowledge workers typically spending about 60% of their time in the office compared to pre-pandemic levels. This stabilization in the labor market led to reduced turnover in office-using sectors but also resulted in slower hiring rates.
This scenario has amplified occupiers’ emphasis on efficient space utilization, with new leasing activity dropping by approximately 15% compared to 2019, largely due to smaller lease sizes. The decline in activity was particularly noticeable in first-generation spaces, despite sustained demand, leading to a net move-out of 65 million square feet in 2023, totaling over 180 million square feet since the beginning of 2020.
While the sharp decline in construction activity due to rising interest rates may eventually tighten the market for premium office space in the future, the immediate recovery appears distant. Cost-cutting measures, including the reduction of underutilized office space, have been prominent themes in recent corporate earnings reports, with available sublease inventory signaling further intentions to trim occupancy.
The forecast for 2024 suggests the possibility of the worst year of negative absorption on record, with vacancy rates projected to rise by another 100 basis points. This downturn in occupancy is reflected in property values, which have already declined by 10-15% since the end of 2021 and are expected to continue falling throughout 2024, particularly for larger institutional-grade buildings. However, there are pockets of resilience, notably in markets experiencing corporate migration like Texas and South Florida, as well as supply-constrained markets such as Cincinnati, Indianapolis, Jacksonville, and the Inland Empire. Despite these bright spots, most office markets are expected to endure prolonged turbulence as demand struggles to rebound.
Multifamily market
In 2023, the U.S. multifamily market experienced a robust demand rebound driven by rising consumer sentiment and moderating inflation. Throughout the year, full-year absorption surged by 111% compared to 2022, reaching 315,000 units. However, this impressive demand increase was overshadowed by the delivery of 583,000 new units, the highest since the mid-1980s. Consequently, the supply/demand imbalance led to a rise in the vacancy rate from 6.5% to 7.6% by December, marking the ninth consecutive quarter of supply outpacing demand. As a result, national rent growth decelerated, ending the year at 0.9%, down 300 basis points from the previous year.
Although overall rent growth remained flat between the third and fourth quarters, the fourth quarter saw steady rent growth for 3 Star properties at 1.5%, while 4- and 5-Star properties experienced a slight improvement from -0.4% to -0.2%.
Regionally, the Midwest and Northeast saw the strongest rent growth in 2023, with nine out of the top 10 markets located in these areas. Notably, Orange County, California, experienced the fastest growth at 3.9%. Conversely, Sun Belt markets saw a significant slowdown in rent growth, with several experiencing year-over-year declines, such as Austin and Orlando.
Looking ahead to 2024, multifamily completions are projected to decrease by 20% to 460,000 units, with most of the new units being delivered at the 4- and 5-Star price point. Consequently, market performance in 2024 is expected to vary widely depending on location and property type, with Southern and luxury properties facing the highest risk of weakness due to oversupply, while Midwest and Northeast locations and mid-priced 3 Star properties could outperform.
Retail market
The U.S. retail market starts 2024 in its strongest position in recent history, fueled by rising demand, reduced bankruptcies, and minimal new supply. Demand for retail space surged by over 53 million square feet in 2023, marking three consecutive years of growth since 2020, totaling over 175 million square feet. Notably, tenants in food and beverage, discount, off-price, and experiential sectors drove more than half of the new leasing activity. Decreased move-outs due to closures or bankruptcies also contributed to the positive trend.
With tight fundamentals, only 4.8% of retail space remained available by year-end, a record low. Despite reduced leasing in 2023, market indicators remain strong, though challenges such as rising operating costs and labor availability persist. New development activity is minimal, with nearly 50 million square feet delivered, well below the 10-year average, mainly comprising single-tenant build-to-suits or smaller spaces in mixed-use projects. Demolition of obsolete space, especially in underperforming malls, continues actively.
Record-low retail construction starts in 2023 indicate little threat from new supply, a trend expected to persist due to changes in construction financing. Despite rent increases moderating, retail asking rents reached a new high of $25.00 per square foot, with expectations of easing back to historical norms as pandemic-induced consumption boost subsides.
Industrial market
As 2024 commences, there are indications of a slowdown in the U.S. industrial market. Despite an expected vacancy rate in line with the 20-year average of 7.3%, challenges may arise in the coming year. While there has been positive net absorption, momentum decreased notably in the latter part of 2023, with the lowest absorption levels seen in thirteen years.
However, early signs suggest stabilization and recovery in tenant demand. Although sales in warehouse-heavy sectors like furniture remain sluggish, overall consumer spending on tangible goods has increased since last spring, supported by declining inflation and steady wage growth.
Despite these positive trends, a surge in new supply is expected to raise the national vacancy rate until mid-2024. This increase in vacancies has moderated rent growth to 5.6% as of the first quarter of 2024, in contrast to the strong gains observed in early 2023.
Moreover, higher interest rates have dampened the commencement of new industrial projects since mid-2023, hinting at a rapid decline in completed projects by late 2024. This could stabilize or tighten vacancies by the end of the year, potentially accelerating rent growth. Additionally, there are plans for over 20 significant electric vehicle, battery, and semiconductor plants to open across the U.S. between 2024 and 2026, expected to drive substantial leasing activity. Further decreases in inflation could reinforce a positive outlook for robust industrial performance by 2025-26.
Trends in the marketplace
When public institutions embark on the planning and development of mixed-use projects, thorough analysis of local market conditions is crucial before finalizing any plans. Many public entities are exploring scenarios to monetize underutilized or vacant properties by examining the real estate fundamentals that impact their assets. These entities are considering a range of hybrid public-private partnership delivery models, which integrate public uses with commercial development opportunities within the same project.
In 2024, high office vacancy rates may lead developers and construction lenders to hesitate, while a diminishing construction pipeline will reduce risks on the supply side in the upcoming years. Similar to the trends observed in 2023, plans for office utilization may need to be downscaled, with alternative solutions such as shared workspaces or value engineering being viable considerations. Just as in the previous year, hybrid working arrangements offer numerous advantages for both businesses and employees in 2024, as companies and the office sectors continue to undergo evolution. The retail market is experiencing its most robust phase in recent memory, driven by heightened demand, fewer bankruptcies, and limited new supply. Industries such as electric vehicles, batteries, data centers, and semiconductors are expected to experience sustained growth for industrial purposes, while the continued housing shortage in many urban areas will bolster the multifamily sector.
Just as in the previous year, hybrid working arrangements offer numerous advantages for both businesses and employees in 2024, as companies and the office sectors continue to undergo evolution. The retail market is experiencing its most robust phase in recent memory, driven by heightened demand, fewer bankruptcies, and limited new supply. Industries such as electric vehicles, batteries, data centers, and semiconductors are expected to experience sustained growth for industrial purposes, while the continued housing shortage in many urban areas will bolster the multifamily sector.
Innovation hubs and specialized districts will continue to influence projects in 2024, as the life science industry and other innovative technology sectors have demonstrated resilience during economic downturns. Universities are collaborating with developers and industry partners to create innovation hubs with a specific focus on innovation, student development, and shared project risks and long-term revenue opportunities in research, technology, and medical development. On the private sector side, various economic and real estate factors could lead to renewed risk assessments to engage in these types of projects, epically ones reliant on large volumes of pure office space
Our projects
WT continues to be engaged on some of the most compelling and dynamic real estate projects across the country that are either real estate specific in their transaction structuring or include a combination of public infrastructure and private real estate development components. As we continue our delineate with current and potential clients, WT is project delivery agnostic and possesses the capabilities to assess, procure and deliver a wide range of project types. This means we are not looking to push a more robust Design Build Finance Operate and Maintain delivery model on projects that might not require stringent performance specifications and longterm operations and maintenance agreements. At the same time, we also understand how to deliver a more traditional real estate-based transaction that is focused on land use and programming that meets the clients’ expectations given our decades of working on complex projects. These current real estate and P3 projects include:
- State of Hawaii – WT continues to work closely with the State of Hawaii on the New Aloha Stadium Entertainment District (NASED) where WT is helping to lead a procurement for a Master Developer to deliver a new Aloha Stadium under a Design Build Operate and Maintain P3 structure and a live-work-play-thrive mixed-use real estate development that will surround and integrate with the new Aloha Stadium. The response deadline for the qualifications phase concluded earlier this month on Feb. 14. Responses will be evaluated, and priority-listed offerors will be selected and notified in April 2024. This notification will mark the end of the qualifications phase and commencement of the proposals phase. The deadline for proposals will be in Summer 2024, with the selection of a preferred offeror targeted for Fall 2024, and final execution of an agreement targeted for Summer 2025.
- City of North Miami, Florida – WT continues to work closely as the lead P3/Real Estate advisor on this vitally important community revitalization project in the City’s downtown core. In this project, the outdated city hall and police headquarters need to be replaced onsite. The procurement team anticipates releasing the City Hall RFP in the near future, and then a separate RFQ will be issued for the mixed-use real estate development opportunity that surrounds the civic plaza.
- Oregon State University – WT is working diligently to assist OSU with the preparation of a final report that summarizes key real estate market metrics, anticipated employment growth and project delivery options as it pertains to the development of an innovation district on areas adjacent to the campus in Bend, Oregon. The final report, expected in spring 2024, will provide options to OSU as it pertains to moving forward with a formal solicitation process to select a developer for the first phase of development.
- University of Texas San Antonio –WT is currently engaged on a variety of real estate activities for University of Texas at San Antonio (UTSA). This includes assessment, procurement, and delivery for multiple projects through both traditional and alternative delivery models. As part of this engagement, WT provided Integrated Project Delivery and Program Management for the UTSA’s School of Data Science and Natural Security Collaboration Center. WT also acted as the lead project manager for UTSA’s total acquisition of the Southwest School of Art, including all real estate properties, arts programs, assets, and resources, for expansion into the new UTSA Southwest. WT continues to be engaged in real estate due diligence and market analytical services on UTSA’s Park West Redevelopment and their Hemisfair Campus, which houses the Institute of Texan Cultures (ITC). Services for these two projects included analysis of historical background, vacant land, economics, demographics, housing and private development opportunities, and ad-hoc procurement document drafting assistance. As the ITC project progresses, WT’s analysis will support the University in evaluating alternate locations for the Institute and development opportunities within the Hemisfair Campus.
- Nevada State University – WT is continuing to engage with leadership at Nevada State University and the Nevada State Campus Land Corporation to help evaluate a variety of real estate fundamentals, project delivery options, and overall business case for 228 acres adjacent to the NSU campus in Henderson, Nevada. The compelling project includes contemplated ground leases between the Land Corporation and developers to construct a variety of commercial space that supports the mission and values of the campus. Efforts are focused on an early fall 2024 market day to share more details about development opportunities and phasing with development and capital markets.
- Eureka Development – WT was engaged by Eureka Holdings, who have a significant commercial real estate portfolio in East Austin. WT provided in-depth entitlement summaries for Eureka’s commercial assets as it related to a comprehensive rezoning for a major corridor overlay administered by the City of Austin. These findings allowed Eureka to understand how the new zoning changes would impact their properties’ developability and identify the highest and best use for each property. Eureka has since then begun their development strategy and identifying immediate rezoning opportunities on a parcel-to-parcel basis.
Sources:
CoStar. (2024). Industrial National Report – United States. CoStar Group.
CoStar. (2024). Multi-Family National Report – United States. CoStar Group.
CoStar. (2024). Office National Report – United States. CoStar Group.
CBRE. (2024). U.S. Real Estate Market Outlook. CBRE Group.
JLL. (2024). Global Real Estate Perspective. Jones Lang LaSalle Incorporated.
