Top 10 Issues Affecting Commercial Real Estate®
The Counselors of Real Estate® (CRE) release their highly anticipated list of the Top Ten Issues Affecting Real Estate in 2024 as we approach 2025.
Navigating the Shifting Landscape of Commercial Real Estate in 2024
The commercial real estate landscape in 2024 is marked by several challenges, shifts, and emerging trends. As the market continues to adjust from the pandemic’s impact, key factors like housing affordability, AI in real estate, office space dynamics, and evolving sustainability requirements are shaping the industry’s future. Here’s a closer look at the top ten issues CRE professionals should be aware of this year:
1. Global & U.S. Elections: A Key Influence on CRE
The 2024 elections are set to shape the global and U.S. economy, potentially influencing the commercial real estate market. Election results could lead to changes in tax policy, infrastructure spending, and regulations that directly impact CRE. With candidates taking varying positions on issues like sustainability, housing, and economic growth, the outcome of these elections will play a significant role in determining the direction of real estate investment and development.
2. Cost of Financing: Investors Caught Between High Rates and Market Uncertainty
The commercial real estate market continues to struggle with the effects of rising interest rates, which have disrupted financing and deal-making. The era of low-cost capital, which has dominated since 2009, has ended, leaving many investors with high refinancing costs and uncertain market conditions. Despite some signs of stabilization in transaction volume, uncertainty remains, particularly as investors remain cautious about paying high prices in a market where forced sales could lead to distressed assets. While rate cuts in other regions offer some hope, many buyers are holding off, with the full effects of these higher rates expected to continue for at least another year or two.
3. Loan Maturities & Debt Repricing: The Looming Debt Cliff and Market Impact
The commercial real estate industry faces a significant challenge as nearly $1.8 trillion in loans are set to mature before 2026. While many lenders have been extending these maturities in hopes that market conditions will improve, this strategy can only go so far. Banks, already limited by regulatory oversight, are unable to continue pushing back loan maturities without adequate capital reserves.
As interest rates remain high, refinancing becomes increasingly difficult, especially for borrowers who financed properties when rates were near zero. For those facing near-term maturities, debt service payments could increase by as much as 100%, creating serious financial strain. The market’s ability to absorb these challenges will depend on how quickly these loans are resolved. If debt maturities result in discounted sales or defaults, it could trigger a wave of distress that further impacts property values and market stability. However, a methodical unwinding process, aided by opportunistic investors on the sidelines, could mitigate the worst effects of this looming debt crisis.
4. Geopolitics & Regional Wars: Managing Risk in a Turbulent World
In today’s volatile geopolitical climate, risks from global conflicts—such as the wars in Ukraine and Gaza—are creating ripple effects across real estate markets. These conflicts disrupt supply chains, increase inflation, and exacerbate labor and housing affordability issues, all of which ultimately impact property prices and market stability.
During times of heightened global risk, international capital tends to seek safe haven in U.S. dollar-denominated assets, providing support for U.S. commercial real estate. However, this influx is counterbalanced by the challenges facing key property sectors. Office spaces are grappling with the slow return to the workplace, retail is strained by e-commerce and weak consumer confidence, and industrial properties are affected by ongoing supply chain disruptions.
Investors must recognize that, in the current environment, cap rates and pricing are likely to rise. A “higher-for-longer” risk-free rate means investors should factor in a higher risk premium when pricing assets. Even as the Fed may reduce rates, these adjustments won’t necessarily lead to equivalent reductions in cap rates. Real estate cycles, traditionally used to guide investment decisions, are being disrupted by the ongoing pandemic recovery and global conflicts. The future cannot be predicted based on recent trends, and investment strategies must consider the specific risks and conditions of individual markets and property types. The key takeaway for savvy investors: good investments are still possible in challenging markets, but those decisions must be made with careful judgment in an era defined by uncertainty.
5. Insurance Costs: Managing Rising Premiums and Exploring Cost-Saving Strategies
Soaring insurance costs have left property owners facing double- and triple-digit premium hikes, driven by inflation, extreme weather events, and insurers recovering losses. Last year, global natural disasters caused $380 billion in damages, with only 31% covered by insurance.
To manage rising costs, owners are working with brokers to ensure accurate property valuations and considering cost-saving strategies like aggregate deductibles. Alternative risk transfer solutions, including multi-year policies, offer another way to manage financial risk.
As losses increase, owners must find new ways to balance risk, possibly by self-insuring or rethinking insurance structures to improve efficiency over the long term.
6. Housing Affordability & Attainability: Addressing the Growing Crisis of Rising Costs
The lack of affordable housing continues to worsen. Nationally, multifamily rents have increased by 45% from 2009 to 2023, while the housing shortage is estimated at 4.4 million units. Although multifamily construction has increased, development is concentrated in just a few major metros, leaving many areas underserved.
To tackle this issue, both new construction and the preservation of existing affordable housing are needed. More affordable housing is required across all income levels, not just for low-income households. According to the 2022 American Community Survey, nearly 54% of renters are now cost-burdened, a sharp increase since the Great Recession.
The outlook is challenging, with a projected decline in new construction starts and growing demand from younger renters. This will likely intensify affordability pressures by 2025. Solving this problem will require both private sector involvement and government support through tax incentives, subsidies, and zoning reforms to increase housing density.
7. Artifical Intelligence: Advancement & Challenges in Real Estate
AI’s rise, fueled by ChatGPT, has brought significant attention to its applications, but challenges remain in commercial real estate. The effectiveness of AI relies heavily on three factors: accuracy, granularity, and timeliness. Accurate data inputs are essential, as algorithms cannot work around inaccurate information. Additionally, real estate faces issues in AI’s understanding of location nuances and market conditions due to lagging data collection and the algorithm’s lack of context.
While AI can optimize multifamily rents, challenges remain in refining data quality. Real estate data is fragmented, and without accurate, granular, and timely inputs, algorithms won’t yield optimal results. Moreover, AI’s reliance on vast computing power has fueled a boom in data center development, although there’s still work ahead in making these systems more efficient and scalable.
8. Sustainability: Preparing Commercial Real Estate for the Future
Sustainability is a long-standing focus in real estate, but extreme weather events and evolving regulations are pushing it higher on the agenda. With disasters like hurricanes, wildfires, and floods becoming more frequent and severe, property owners face increasing pressure to understand their carbon footprints and engage in decarbonization efforts.
New regulations are also on the horizon. Europe is leading with stricter sustainability requirements, such as the Corporate Sustainability Reporting Directive and Minimum Energy Efficiency Standards, while the U.S. is seeing growing state-level mandates on building performance and emissions. These changes create both challenges and opportunities for real estate owners to future-proof their properties by enhancing energy efficiency and resiliency against extreme weather.
Building a business case for sustainability and investing in long-term resiliency will help protect property values and meet evolving regulatory demands.
9. Office Vacancies, The Tax Base & The Health of Urban Cores: Navigating Post-Pandemic Shifts
The office market continues to struggle with lasting changes in work habits, particularly remote work. The U.S. vacancy rate is expected to peak at 19.7% by the end of 2024, with cities like New York experiencing only about 50% office attendance.
These shifts are having significant ripple effects, especially on central business districts (CBDs), which rely heavily on office buildings for tax revenue and economic activity. Lower occupancies are impacting owners, lenders, and investors, with office property values and rents dropping in major metros like New York, San Francisco, and Chicago. Capital for office buildings is harder to secure, and necessary renovations to attract tenants require more investment.
Cities face tough decisions on how to adapt. While converting office space into housing could help address urban housing shortages, it’s often costly and impractical. Creative solutions, like repurposing buildings for residential, healthcare, or education uses, are emerging in cities like New York. Revitalizing CBDs will require a diversified mix of uses and collaboration between the private and public sectors to ensure long-term viability.
10. Price Expectations Gap: Loan Maturities May Bridge the Divide
The divide between buyers and sellers persists, but the gap is no longer widening. Prices fell sharply in 2023 across all sectors, with the most significant drop in CBD office properties, though declines are now slowing. As of Q2 2024, the year-over-year decline for CBD office assets improved to -29.4%, offering a hopeful sign.
Most sectors are seeing pricing trends stabilize, with industrial properties showing an 8.6% price increase in Q2, according to RCA CPPI™. The worst of the pricing shock appears to be over, though uncertainty remains due to factors like economic slowdowns or falling consumer spending.
Buyers and sellers are holding firm, but the upcoming wave of loan maturities may push both sides closer. Owners facing expensive refinancing could be motivated to sell, and the capital on the sidelines may start moving more aggressively. A decline in interest rates or renewed rent growth could further help close the gap. Though buyers remain cautious, they may be more willing to take risks now than a year ago.
Conclusion
As we head into 2025, commercial real estate professionals face a range of challenges—from rising costs and shifting office demand to evolving AI applications and sustainability pressures. While the market is still navigating uncertainty, opportunities exist for those willing to adapt, innovate, and think creatively. Whether it’s reimagining office space, embracing AI advancements, or preparing for stricter sustainability regulations, the future of real estate will be shaped by those who are proactive in addressing these key issues.
Van W. Martin Holds Prestigious CRE® Designation
Van W. Martin, President and CEO of Martin Commercial Properties, holds the prestigious Counselor of Real Estate® designation, a mark of distinction reserved for only the most accomplished real estate professionals. As one of fewer than 1,000 Counselors of Real Estate® worldwide, Martin exemplifies a deep commitment to delivering exceptional insights and innovative solutions to clients.
Martin emphasized the value of staying ahead of industry trends, saying,
“The CRE’s Top Ten Issues report is a powerful tool for understanding the forces shaping real estate today. At Martin Commercial Properties, we bring unparalleled expertise to help our clients address these challenges and uncover opportunities in a rapidly evolving market.”
– Van W. Martin
The Counselors of Real Estate® and its 1,000 credentialed real estate advisors have identified the current and emerging issues expected to have the most significant impact on all sectors of real estate. The Top Ten Issues Affecting Real Estate® are determined through broad membership polling, discussion, and debate. Now in its 13th year, this signature thought leadership initiative is an invaluable resource to clients of Counselors worldwide and to the real estate industry in general.