CBRE’s 2024 US Real Estate Outlook: While Property Values Will Fall Further, Vacancies Will Rise

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Photo: CBRE

CBRE foresees economic growth slowing in 2024, though a recession may be avoided and real estate transaction values will decline further, creating compelling buying opportunities, according to the company’s 2024 U.S. Real Estate Outlook.

CBRE’s economists anticipate that resilient consumer spending will counter economic headwinds next year including high interest rates and near recessions in Europe and China. CBRE predicts the U.S. unemployment rate rising slightly to 4.5% and an easing of inflation that will allow the Federal Reserve to reduce short-term interest rates to around 4.25% by the end of 2024 and to 3.5% in 2025.

This anticipated economic bottoming out and initial rebound will affect all sectors of commercial real estate. CBRE sees lending remaining tight, property values declining further in the first half of the year before activity rebounds in the second half, a topping out of office vacancy, and a wave of multifamily construction.

“There is a bit more real estate pain ahead, but stabilization and the early stages of recovery aren’t far behind that,” said Richard Barkham, CBRE Global Chief Economist and Global Head of Research. “Investment volumes will be down overall for 2024 but will start an upturn in the second half. And leasing activity will pick up a bit from a sluggish 2023.”

CBRE’s report details the company’s outlook for multiple sectors.

Capital Markets:

CBRE expects that the bottom for property pricing will occur in the first half of the year. Capitalization rates – a measure of a property’s cash flow as a percentage of its value – will expand by 25 to 50 basis points (bps) in 2024, translating to a further 5% to 15% decline in values.

Investment volume will decrease 5% in 2024, stabilizing after this year’s expected 45% fall. All-cash buyers such as sovereign wealth funds, pension funds and endowments likely can pounce quickest on generational buying opportunities in the first half.

Banks’ appetite for lending on commercial real estate will remain muted throughout the year.

Office and Occupier:

U.S. office vacancy will peak at 19.8% in 2024, up from 18.4% in Q3 2023 and 12.1% at the end of 2019. Office-leasing activity will revive slightly in 2024 but remain significantly below prepandemic levels. Companies seeking blocks of office space of less than 20,000 sq. ft. will account for the bulk of leasing activity. Office construction will slow to the lowest level since 2014, raising the prospect of a shortage of available Class-A space later in the year.

Retail:

A long-running lack of new retail construction will contribute to retail availability rates declining by 20 bps in 2024 to a scant 4.6%. CBRE foresees retail spending moderating to 2.6% in 2024 from 4.4% in 2023, and net absorption – which is new demand for retail space – declining to 28 million sq. ft. from 35 million sq. ft. a year earlier. Luxury retailers will look to expand in U.S. resort markets and underserved major metros like Dallas and Houston.

Industrial & Logistics:

This sector will be active in 2024, with net absorption on par with 2023 and annual taking rent growth moderating to an 8% gain by year end. Construction completions will amount to half of the 2023 total. Vacancy will rise to around the five-year average of 5% by mid-2024 from 4.2% in Q3 2023 but will decline the second half of the year due to a significant decline in new construction. The forecast 7.5% increase in U.S. industrial production over the next five years bodes well for demand for U.S. manufacturing and distribution space.

Multifamily:

A wave of new supply – roughly 900,000 units currently are under construction – will define this sector in 2024. Rents will grow by a weaker-than-average 1.2%. Vacancy will increase above prepandemic levels, but enough demand will keep the average occupancy rate above 94%. Construction starts will decline in 2024 to 70% below the 2022 peak. Buying will remain more expensive than renting; The premium of the average monthly mortgage payment for a newly purchased home will remain 35% higher than the average monthly rent next year.

Hotels:

A slower economy will dampen growth in RevPAR – revenue per available room – to a 3% gain in 2024. Urban hotels will fare well, and airport hotels will benefit from increased travel, but resorts will register the slowest growth. As in previous slowdowns, upper-midscale hotels will benefit from travelers trading down from pricier options.

Data Centers:

Demand will continue to exceed supply, raising pricing (on 250 kw to 500 kw requirements) by 10% to 15% in 2024 after an expected 16% increase in 2023. Construction activity in major markets will exceed 3,000 MW in 2024, compared to CBRE’s 2023 estimate of 2,500 MW. Markets including Austin, San Antonio and Omaha will attract development and investment due to land availability, power-infrastructure development and tax incentives.

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