The commercial and investment property sectors are undergoing significant shifts as the real estate market adapts to new norms in a post-pandemic world, according to the “Emerging Trends in Real Estate 2024” report from the Urban Land Institute and PwC. Commercial real estate professionals are grappling with key trends that are reshaping the industry and influencing investment decisions.
Anita Kramer, Senior Vice President of ULI’s Center for Real Estate Economics and Capital Markets, emphasizes that the real estate industry is entering a new era marked by changing work models, the resilience of the retail sector, and the growth of Sun Belt markets. The report, titled “The Great Reset” in real estate, identifies emerging trends that will shape the industry in 2024:
- Retail Rebound: Despite challenges from e-commerce, demand for retail property has surged in the past 18 months, leading to approximately 35 million square feet of new retail space across the U.S. Retail is regaining strength as an investor preference, particularly in suburban areas. Grocery-anchored community or neighborhood shopping centers are a notable attraction for retail investors.
- Hybrid Work Continues: The preference for hybrid work settings, combining remote and in-person work, is impacting the appeal of office buildings. Investors are becoming wary of high vacancies in office buildings, leading to considerations of adaptive reuse, demolition, or repurposing. The report highlights the need for solutions in addressing office space challenges.
- Sun Belt Growth: The southern U.S., known as the Sun Belt, is experiencing significant growth, attracting firms and investors due to lower regulations, taxes, and a growing labor force. Cities in the Sun Belt dominate the “markets to watch” list for 2024. However, the report cautions about rising climate change risks, such as excessive heat, that could affect positive investment trends in the region.
- Debt Concerns: Rapidly rising federal debt is identified as a potential factor that could crowd out private investments in the real estate industry. The report warns of the possibility of slower economic growth and higher interest rates, leading to delays in property construction and returns. Despite challenges in credit availability, some investors are cautiously pursuing deals.
- AI Advancements: While artificial intelligence (AI) applications in commercial real estate were limited in 2023, the report anticipates greater applications emerging in 2024. AI is expected to enhance property search and analysis, reshape investment assessments, improve the customer experience, and provide fraud detection in real estate transactions. The commercial market is likely to see increased experimentation with AI.
- Climate Change as a Priority: Billion-dollar climate events are on the rise, prompting government regulations and proposed ESG mandates. Property owners and managers are urged to prioritize environmental, social, and governance (ESG) considerations. The report emphasizes the need for repositioning developments to highlight sustainability, retrofitting buildings, and exploring “design for disassembly” for obsolete assets.
- Downtown Reinvention: Concerns about the future of downtowns are growing, with vacant office buildings and decreased tax revenues contributing to challenges. The report suggests that downtowns may need to be redeveloped, focusing on creating vibrant “live/work/play” environments to compete with suburban growth. This may involve the conversion of empty office buildings and addressing public transit deficiencies.
- Housing Affordability Challenges: Affordability remains a top challenge for the commercial sector, mirroring trends in the residential market. The U.S. has witnessed a rapid deterioration in real estate affordability over the past three years. The report emphasizes the need to build more housing at various price points to address the affordability crisis.
As the real estate industry grapples with these emerging trends, the report underscores the importance of innovation and adaptation to navigate the evolving landscape and shape a resilient real estate future. Industry professionals are urged to be proactive in responding to these trends and leveraging opportunities for innovation.