The Future of the Commercial Real Estate Market

The economic outlook for the coming years is shaping the commercial real estate (CRE) landscape. Deloitte’s 2024 commercial real estate outlook highlights several key factors influencing property valuations:

• Expense Mitigation: A significant focus on cost reduction, especially in talent and office space, reflects an environment where revenue expectations are at their lowest since 2018. This trend could influence property valuations, especially in sectors where operational costs are a major consideration.
• Cost of Capital and Availability: Approximately 50% of respondents expect cost of capital and capital availability to worsen through 2024, which could impact investment decisions and valuations in CRE.
• Cyber Risk: The growing concern about cyber risk, especially as smart technologies become more prevalent in buildings, indicates a shift in factors considered in property valuations.

Changing Property Sector Dynamics

• Leasing Fundamentals: There are expectations of worsening leasing fundamentals, including vacancies, leasing activities, and rental growth, which will likely influence property valuations over the next 12 to 18 months.
• Shift in Attractive Property Types: Digital economy properties (data centers, cell towers) are now viewed as the most attractive risk-adjusted opportunities. The office sector, both downtown and suburban, has dropped significantly in attractiveness, reflecting the impact of hybrid work models on property valuations.
• Remote Work’s Impact on Office Valuations: The remote work trend continues to disrupt office space demand. Despite job additions, the office sector has seen significant space and valuation declines. There is a clear trend towards quality, with newer, high-quality assets outperforming others.

Sector-Specific Trends

• Industrial Market Strength: Continued demand for industrial spaces, driven by e-commerce and third-party logistics, suggests sustained competition and rent growth, positively impacting valuations in this sector.
• Multifamily Rental Demand: Interest rate hikes have led to a decline in home sales, subsequently increasing the demand for multifamily rental properties. This trend suggests continued rent growth and robust valuations in the multifamily sector.

The future economic projections indicate that commercial real estate valuations will be influenced by a combination of economic factors, including cost mitigation efforts, capital availability, cyber risk considerations, and changing preferences towards property types. The ongoing shift towards digital economy properties, the impact of hybrid work models on office space, and sustained strength in the industrial and multifamily sectors are key trends that CRE professionals should consider in their valuation strategies.

The need for continuous monitoring of these trends is essential for anyone involved in CRE. Staying informed and engaged with the evolving market dynamics will enable investors, developers, and appraisers to make informed decisions and strategically navigate the complexities of CRE valuation. At LPA, we understand that as we move forward, adapting to these changes and leveraging the insights gained from in-depth analysis will be key to success in the commercial real estate market. We are here to assist you as you navigate the market as well.

Contact us today for any of your commercial real estate needs.