Welcome to the post-pandemic world, says Urban Land Institute and PwC’s Emerging Trends in Real Estate 2024 report. After the turmoil of the past few years, a new normal is emerging that features higher interest rates and slower growth for a longer period of time. The theme of 2024 might be “survive until ’25.” The following summarizes the major takeaways from the report and ULI Northwest’s Emerging Trends presentation in mid-November.

Top Markets to Watch
Seattle Ranked 10th
Despite its rainy and cooler climate, Seattle’s real estate is performing more like a Southeast growth market, industry leaders say. The region’s multitalented workforce and diverse economy, which produce a wide range of goods and services, make it an attractive target for investors. For 2024, local experts expect to see some construction material costs fall in framing, shoring, and excavation but remain high in concrete. The bidding environment for general contractors will be more competitive as more firms apply for bids. Though office conversions are the talk of the town, a big market for such conversions is not expected in the Seattle area, due to the difficulty in obtaining financing, the long approval runway, and the challenge to get current office tenants out of buildings in meaningful quantities.

Portland Ranked 51st
Portland rose slightly from the 56th highest market to watch to the 51st in this year’s report. Portland had for years been among the top markets in the U.S. but fell in the rankings recently. The 2024 survey found that 58% of respondents recommended selling office property in the city, while 29% recommended holding.

Survive Until ’25
Commercial real estate capital has become expensive and hard to come by, which has decreased transactions and undermined project feasibility. Distress levels are still low, but liquidity may become a huge issue. Over the next two years, an estimated $1.2 trillion of commercial and multifamily mortgages will mature, which accounts for 40% of all outstanding CRE mortgages. Most of this debt will be refinanced at higher rates, but lenders might be willing to negotiate extensions to avoid owning these properties and writing down their loan portfolios. Delinquency and default rates are expected to rise significantly in the office and multifamily sectors. Industry leaders regard 2025 as a potentially healthy recovery year. So for 2024, the goal will be to survive until ’25.

“The Great Reset”: The New Normal Has Arrived
Don’t expect a return to the pre-pandemic world, commercial real estate industry leaders assure us. Gone is the era of 5 days a week at the office, low interest rates, and traditional CRE portfolios. The world we see today is the new normal.

• “Higher and slower for longer.” Even though industry leaders expect interest rates to fall in Q3 or Q4 of 2024, only 3 in 10 respondents expect commercial mortgage rates to drop in 2024. Transaction volume slipped 26.1% in the first half of 2023 from the first-half average in 2015-2019. But sales in the office sector were down 60% from 2015-2019 levels. In 2024, deals will get done but will have to be smaller and involve creative financing, such as seller financing, foreign fund investment, or capital from family offices. For transaction volume to increase overall, buyers, sellers, and developers will have to adjust to the new normal of higher interest rates and new pricing.
• Work from home is here to stay. The office property sector is going to start to look like the retail sector did 3-5 years ago. It must reconsider its purpose and what constitutes a sustainable size. The newest, premier Class A office buildings will see high tenant demand and higher rents, but older Class A and Class B offices face leasing and rent headwinds. Owners of these properties ought to consider whether they should upgrade their holdings or convert them to use types other than office.
• Portfolios are pivoting away from the traditional “core” assets of office and regional malls to industrial, multifamily, and niche property types. As office and regional mall property types no longer offer their typical stability, institutional investors are trying to figure out where to redeploy their capital. Increasingly, fund managers are considering newer niche product types that offer more compelling returns. The definition of core assets is expanding to include self-storage, digital infrastructure, and data centers. Survey respondents for the 2024 Emerging Trends report identified specialized subsectors, such as data centers and moderate-income/workforce apartments, among the five highest-rated investment sectors.

Multifamily Optimism
Given the imbalance in supply and demand for housing units, industry leaders remain bullish on multifamily construction in the long run, while acknowledging the near-term pains of capital crunch and increased material costs. “[T]he sector has favorable long-term fundamental drivers and a less-difficult path relative to other asset types on the other side of the current interest rate-driven malaise,” the report says. However, experts expect the Seattle market to see fewer multifamily projects proposed in the region next year, due to the supply expected to come online in 2024, the reduced rents that will result, and the increased cost of capital, which is making some projects no longer pencil out.

AI Emerges
CRE has not seen widespread adoption of AI in 2023. The industry is still trying to understand possible uses of the technology. For now, industry experts believe AI will find a use in design, operation and management, lease and sale, and construction of more profitable portfolios. In the future, AI might displace some CRE employees who do routine tasks, but jobs that require the human touch are likely to remain relatively safe.