WASHINGTON – As we enter a new year, the commercial real estate industry finds itself at a new crossroads.
After years of new challenges, markets continue to be shaped and redefined. In 2023, the industry remained volatile as economic uncertainty continued, large companies changed their return-to-work plans, and rising interest rates continued to limit access to affordable financing. As a result, many real estate companies are still experiencing declining revenues due to rising vacancy rates and slowing rental growth.
However, despite the challenging past few years, there are still many reasons to be optimistic about the commercial real estate industry. In fact, many see his 2024 as an opportunity for the market to get back on solid footing. Whether you're a real estate owner, investor, property manager, or tenant, these shifting winds can impact both your short-term and long-term strategies.
As experts in representing clients in all real estate transactions, from small office leases to large mixed-use properties, Buchanan's real estate team closely monitors trends that could significantly impact the future of commercial real estate. doing.
Here are the key trends we're looking at in 2024 and beyond.
1. Evolution of returning to the office
Perhaps the most important trend impacting commercial real estate is the future of companies' return-to-office plans across the United States. After some adjustments and openings since the peak of the COVID-19 pandemic, we are starting to see more momentum behind large real estate. Companies are encouraging employees to return to office spaces. Many of these companies cite declining company culture, less effective training, and a lack of camaraderie as reasons to bring back employees.
To make a return to the office more appealing, landlords and tenants are proactively addressing employee concerns. With physical safety becoming a concern for many employees in metropolitan areas across the country, one step forward-thinking property owners and employers are taking is increasing workplace safety measures. is. They do this by working with security companies and even working with local authorities to increase police presence in the area. As dense metropolitan areas continue to be the most suitable for workspaces due to their proximity to public transportation, office owners and managers must ensure the safety of their facilities to provide peace of mind to their tenants. .
2. Outperforms high-quality offices
Employers are also seeking higher quality “Class A” space to bring employees back to the office. As employers adopt hybrid plans that require only partial attendance throughout the week, many tenants are looking for more amenities that can meaningfully upgrade their offices, such as on-site fitness centers, cafeterias, and outdoor workspaces. I'm looking for a small, high-quality space with a lot of features. Raise the overall rent. Many property owners also plan to upgrade their facilities to make them more attractive to employees and to attract more tenants looking for newer, higher-quality offices.
3. Future of interest rates in CRE activities
Over the past 18 months, rising interest rates have created challenging conditions for the commercial real estate industry. The number of real estate construction projects and transactions decreased due to higher borrowing costs as interest rates rose. Projects that have actually been undertaken are facing significant deficits due to rising interest rates, and owners of existing properties are also facing problems refinancing existing loans.
Most observers expect interest rates to remain flat or decline slightly in 2024. If this happens, it could also lead to more new construction projects as lower interest rates make financing cheaper and more readily available.
4. Changes in the composition of new construction projects
Considering the traditional oversupply of office space, new office construction is expected to be limited in 2024 as well. However, new construction projects are starting to increase in some parts of the market. New construction and large-scale renovation projects are also beginning for properties other than office space, including those in the life sciences industry, universities, and public institutions. But the declining number of union contractors, electricians and other tradespeople could lead to delays in projects where highly skilled workers are preferred.
5. Ongoing property conversion
The availability of surplus office space post-pandemic has increased interest and emphasis on converting some properties into affordable housing. While some buildings may be easier to convert than others (e.g. office buildings without an open center core for light and air and no associated parking), some jurisdictions There is interest in finding ways to make this work, including the financial incentives offered by . to offset costs. But given the difficulty of making these conversions, property owners are seeking further government support in the form of streamlining the approval process and, in some areas, changes to zoning codes.
Commercial properties are also interested in undertaking a different kind of transformation. Property owners with traditionally vacant retail space are looking for ways to transform the area into an entertainment center that draws people to their properties. Tenants offering entertainment services are being actively courted and offered favorable lease terms. By ensuring more entertainment in a shopping center, property owners can increase foot traffic to surrounding retail stores, making the property more attractive to additional retail tenants.
6. Additional Affordable Housing Act
There is a large and continuing need for affordable housing in many regions of the United States. As the National Low Income Housing Coalition (NLIHC) points out in its Out of Reach 2023 report, “The United States currently lacks 7.3 million affordable rental housing units. available to income renters.'' NLIHC also cited data from the U.S. Department of Housing and Urban Development (HUD), stating that, “Between 2011 and 2022, there was no significant change in the number of renters who utilized HUD. However, the supply of low-cost rental units in the private market has decreased.'' In December 2023, HUD released Part 1 of its 2023 Annual Homelessness Assessment Report (AHAR) to Congress, which identified It has been revealed that the number of people experiencing homelessness on a single night has increased by 12% compared to 2017.
The biggest enabler of affordable housing continues to be the federal Low Income Housing Tax Credit (LIHTC). The program has long had bipartisan support and generally benefits households at or below 60% of the area median income. Post-pandemic, these transactions have benefited from additional funding provided by the American Rescue Plan Act of 2021 (ARPA), with the December 31, 2024 obligation deadline approaching. Some recipients may be eligible to receive an unobligated commitment of his ARPA funds before the obligation deadline, provided that ARPA becomes unavailable or development is met by his December 31, 2026 disbursement deadline. It could be timing.
A new Workforce Housing Tax Credit (WHTC) was introduced by bipartisan lawmakers in both the House and Senate following Florida's Live Local Act, which included a variety of measures to encourage housing development for the so-called “missing middle.” was introduced. He helps a wider income range of households who cannot afford 100% market rate rent from her 60% of the area median income. As proposed, WHTC would be much like LIHTC and would focus on segments of the workforce that cannot afford to live in the communities they currently serve, such as teachers and first responders.
The Inflation Control Act (IRA), enacted in August 2022, provides some additional opportunities. The IRA expanded and increased the new energy efficient housing credits available under Internal Revenue Code §45L and added certain provisions designed to benefit developers of LIHTC developments. Updates to Section 48 of the Internal Revenue Code, which is included in IRAs aimed at promoting investment in underserved communities, will help affordable housing developers, sponsors, and investors invest in future developments. This may be a good reason to consider investing in solar or wind farms, which have the potential to reduce operating and utility costs. . HUD will implement Section 30002 of the IRA to reduce energy and water usage in HUD-assisted apartment complexes, make HUD-assisted apartment complexes more resilient to extreme weather and natural disasters, and reduce greenhouse gas emissions. Developed the Green and Resilient Retrofit Program. Emissions from multifamily housing using HUD.
find solid ground
The commercial real estate industry is extremely resilient. After a difficult few years, we expect the market to begin to normalize and become predictable in 2024, achieving some balance. In the meantime, property owners, investors, property managers, and tenants must continue to adapt to this new operating reality and stay ahead of the latest trends and developments. The attorneys at Buchanan stay on top of these changes and can help your business navigate this evolving landscape.
The content of this article is intended to provide a general guide on the subject. You should seek professional advice regarding your particular situation.
© Mondaq Ltd, 2024, Buchanan Ingersoll & Rooney PC, Pittsburgh, Pennsylvania
