NAR's Top Economist Predicts Revitalization of Commercial Real Estate Market Predicted in 2024

2024: A Year of Rejuvenation for the Commercial Real Estate Market?

Lawrence Yun, the chief economist of the National Association of REALTORS (NAR), remains optimistic about the future of the commercial real estate (CRE) market. Despite current challenges, he anticipates a resurgence in the sector, excluding offices, in 2024. However, this recovery is contingent on the Federal Reserve's actions.

The Current State of the Commercial Real Estate Market

Speaking at the 2023 NAR NXT, The Realtor® Experience, Yun highlighted the difficulties plaguing the CRE market. High interest rates are a significant concern, impeding borrowing and making refinancing expensive. With approximately $3 trillion in CRE loans, about $600 billion needs refinancing annually, a task made more challenging by these high rates.

Yun also pointed out the impact of the Federal Reserve's rate hikes on smaller banks. These institutions, including community and local banks, have a larger exposure to CRE. Therefore, any instability in the CRE market disproportionately affects them.

Commercial Real Estate Transactions: A Dwindling Trend

Over the past two years, commercial real estate transaction activity has halved. Sellers are reluctant to lower their prices, and buyers are hesitant to engage due to increased lending costs. This situation has led to a stalemate in the market, with deals becoming increasingly scarce.

Adding to the industry's woes, commercial property prices are dipping below pre-pandemic levels and are projected to decline further. Yun suggests that property owners may need to adjust their expectations and consider closing deals sooner rather than later.

The Impact on Different Sectors

Yun's analysis reveals that rent growth is strongest in the industrial sector and weakest for offices. Office leasing is in the negative, retail leasing is dwindling, and even warehouse and industrial space leasing is low. Office vacancy rates, particularly in major cities like San Francisco, New York City, and Los Angeles, are on the rise.

The 2024 Outlook: A Revival on the Horizon?

Yun's forecast for 2024 hinges on the Federal Reserve's policy. If inflation decreases, the Federal Reserve should consider reducing interest rates. This move could trigger a revival in commercial real estate sales. However, this optimistic outlook is tempered by current economic indicators, including high unemployment rates and weakening wage growth.

Ultimately, the future of the CRE market is uncertain. But with the right policy adjustments, there could be light at the end of the tunnel.