Just Released: Viewpoint 2024 Jan 9, 2024

Integra’s Annual Viewpoint Commercial Real Estate Trends Report Unveils A Mixed Outlook Amidst Rising Interest Rates
31st Edition Examines Evolving Economic Landscape and Key U.S. Property Sectors, Plus Specialty Reports on Senior Housing, Affordable Housing, NNN Properties and Golf Courses

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DENVER, CO — (Jan. 9, 2024) — In a year marked by a complex mix of economic and real estate challenges, commercial real estate professionals face the critical task of navigating a landscape reshaped by shifting trends. Integra Realty Resources’ (IRR) newly released Viewpoint 2024 offers a comprehensive analysis of these shifts, aiming to clarify the clouded market perspectives with data-driven insights.

The question for 2024 remains complex and multifaceted: How will the commercial real estate market adapt to the ongoing economic changes, including the uncertainty around borrowing costs and risk-adjusted equity yield? "Despite the current market downturn, we see significant opportunities emerging from these market adjustments," says Anthony M. Graziano, CEO of Integra Realty Resources. "2024 will be a year where disciplined and well-informed investment strategies will shine."

IRR’s team of nearly 600 valuation advisors throughout the U.S. and Caribbean is continuously monitoring the economy and real estate market. The 31st edition of the annual Viewpoint report dissects key economic conditions and secular trends likely to impact property performance and valuations in the coming year. “Our aim is to offer insights that help our clients navigate the evolving market dynamics,” adds Graziano.

Produced in collaboration with esteemed economist Hugh F. Kelly, PhD, CRE, Viewpoint 2024 reflects on the U.S. economy's resilience in the face of diverse challenges. “While the economy shows signs of stability, the real estate market encounters various pressures, including a slowdown in labor and housing markets. Investors should approach 2024 with a balanced perspective, considering both the risks and potential in different real estate sectors,” Kelly advises.

IRR Viewpoint 2024 Highlights

National Themes

The Economy: Despite multiple headwinds, including geopolitical tensions and inflationary pressures, the U.S. economy shows remarkable endurance. Real GDP growth remains steady, though cautious optimism is warranted given the uncertain global economic climate.

Employment: The employment landscape reflects resilience but also faces hurdles such as strikes and shifting workforce dynamics. The real estate sector feels these impacts, particularly in office space demand and multifamily market shifts.

Interest Rates and Inflation: With the Federal Reserve maintaining higher interest rates to curb inflation, the real estate sector faces a challenging borrowing environment. This scenario necessitates strategic adjustments in investment approaches and will likely slow the new development pipeline into 2024.

U.S Property Markets

Office:

• The past year has seen office buildings across diverse markets, including Austin, Boston, Chicago, Denver, Houston, Los Angeles, San Francisco, Seattle, and Washington DC, experiencing significant value declines, with some areas witnessing more than 20% Y-o-Y declines.
• According to IRR’s report, nearly 63% of office markets are now in recession, highlighting a widespread downturn in the sector.
• The concepts of “urban doom loop” and “office apocalypse” mentioned in the report point to a significant shift in urban office markets, with suburban areas potentially offering more resilience.
• COVID-19’s impact on the office sector continues, including the extensive adoption of work-from-home policies and their influence on office space demand.
• Despite the current downturn, IRR’s report suggests the possibility of improvement in office markets over the coming years.

Multifamily:

• Only 13% of markets are in recession, but a significant percentage (63%) are in hypersupply, mainly due to rapid capital deployment in 2021-2022, indicating a potential imbalance of supply and demand.
• Multifamily housing starts are reaching decades-long highs, with projections of 1.5 million units delivered by 2025. This high rate of new unit delivery, especially in markets like Austin, Nashville, and Charlotte, is outpacing sustainable demand trends.
• In many of these high-supply markets, the rent-to-income ratio is already above 30%, posing affordability challenges, especially in Sunbelt metros that have traditionally boasted cost advantages.
• Multifamily operators, particularly in the South and West, are facing double-digit increases in operating expenses, with factors like soaring insurance costs in climate-affected areas putting additional pressure on the bottom line.
• Given these challenges, the multifamily market in 2024 is poised for a complex year, with potential adjustments in cap rates and transaction volumes as the market responds to the interplay of increased supply, affordability issues, and unexpected operational costs.

Retail:

• The retail sector is showing resilience with only 24% of markets in recession and 13% in the hyper-supply category. This indicates a positive shift, with a substantial number (36%) of markets in the recovery phase and 27% in expansion.
• There's a focused intensification on sectors demonstrating sales growth, such as restaurants, bars, groceries, and health product stores. This trend suggests a strategic shift in tenancy to align with consumer demand.
• After the initial surge, the growth curve of e-commerce appears to be flattening, indicating a maturing industry. This shift may suggest a more balanced competition between online and brick-and-mortar retail.
• Occupancy rates in the retail sector have remained stable over the past year, with community and neighborhood retail properties showing consistent vacancy rates. This stability, coupled with rising market rents, suggests a cautiously optimistic outlook for the sector.
• Retail still faces financial pressures, evidenced by the highest delinquency rate in CMBS assets, but the trends in market rent and vacancy rates might support more favorable conditions. Investors and operators in the retail sector will need to navigate these mixed signals carefully in 2024.

Industrial:

• Although the industrial real estate sector remains in a relatively strong position, it's facing challenges, with total returns year-over-year for industrials at a negative 5.3%. This indicates a less robust environment compared to previous years, yet still outperforming other commercial property types.
• There are recorded increases in industrial cap rates and discount rates across various regions, reflecting a cautious approach by investors due to economic uncertainties and the shifting market dynamics.
• Vacancy rates are on the rise in all regions, signaling a slight cooling in the market. However, market rents are also increasing, suggesting that demand for industrial space remains healthy.
• The U.S. economy's overall growth, particularly in personal consumption expenditures on goods, is fueling demand for industrial space, indicating a strong correlation between the broader economy and the industrial sector's health.
• The industrial sector is entering a phase of readjustment in 2024, balancing the effects of economic slowdown with the strong fundamentals of user demand. Investors and operators in this sector will need to navigate these mixed signals, with a focus on adapting to the changing market conditions.

Hospitality:

• The hospitality industry continues its recovery from the pandemic’s negative effects, but faces new challenges such as a slowing economy, reduced discretionary spending, and rising labor and operational costs, which are affecting the sector’s momentum.
• There has been an approximate6% increase in U.S. average Revenue per Available Room (RevPAR) over the past year, largely driven by Average Daily Rates (ADR). However, this growth comes amidst economic uncertainties, including the possibility of a recession and ongoing inflation, which may impact future industry performance.
• Recent trends indicate a shift in demand, with increases in weekday travel offset by a decrease in weekend stays. This suggests a resurgence in business and group travel, which had lagged behind leisure travel in the post-pandemic recovery phase.
• While RevPAR is trending positively, the broader outlook for the hospitality industry remains cautious. Macroeconomic factors such as potential recession risks and inflation are likely to influence the industry's ability to maintain stable occupancy and ADR levels.
• The top 25 markets in the U.S. have shown year-over-year ADR increases of over 10%. However, the performance varies significantly across different markets, with some experiencing more robust growth than others.

Specialty Property Reports

• Healthcare & Senior Housing: This sector is navigating a post-pandemic recovery, with improved occupancy rates and workforce stabilization. However, it faces challenges from higher interest rates, impacting construction costs and sales activity. The upcoming phasing out of federal Medicaid funding enhancements and proposed minimum staffing standards for skilled nursing facilities could further influence operational dynamics.
• Affordable Housing: The affordable housing sector is grappling with significant undersupply and rising development costs. The Low-Income Housing Tax Credit (LIHTC) program remains pivotal in addressing this shortage, but economic trends since 2020 and recent interest rate hikes have complicated development efforts. The sector also faces the potential conversion of existing affordable units to market-rate housing as LIHTC compliance periods expire.
• NNN Properties: In a volatile market environment, the relationship between corporate bond yields and net lease capitalization rates for properties secured by credit tenants is crucial. Investors are keenly observing the impacts of rising interest rates and their effect on cap rates, with a focus on adjusting for yield effectively based on lease term, credit rating, and real estate-specific factors.
• Golf Courses: The golf industry has seen a surprising rebound over the past three years, with increased rounds played and robust participation in both on-course and off-course activities. Despite economic challenges, investor interest in golf properties is growing, driven by positive fundamentals and limited inventory, though the industry is mindful of the challenges in securing debt in the current economic landscape.