By David Zimmel, Zimmel Associates
As we step into the new year, it’s essential to take stock of the evolving dynamics in the commercial real estate industry and forecast what lies ahead. In this article, I’ll share my insights on the commercial real estate market in 2024, focusing on the industrial, office, and retail sectors, as well as the impact of inflation and interest rates.
Industrial Sector: A Shift in Supply and Demand
Let’s begin with the industrial sector. Over the last twelve to 18 months, we’ve witnessed a notable surge in available industrial properties, particularly those exceeding 100,000 s/f. The primary catalyst for this influx is twofold. First, land sales have proliferated, leading to a surge in construction projects. Second, third-party logistics companies, initially expanding to support giants like Amazon, now find themselves with surplus space. Amazon, in particular, is looking to return some leased space in certain areas across the country.
However, it’s crucial to note that the sub-100,000 s/f industrial spaces remain in high demand. This continued demand is driving rental prices, which, despite the increase in availability, have not dropped significantly. Nevertheless, I anticipate a slight dip in industrial rents throughout 2024, possibly up to 10%, as more space becomes available and tenants prioritize securing lower rents over holding out for higher rates.
Office Sector: Adaptation is Key
In the realm of office space, the landscape remains challenging. While prime A-grade buildings are likely to maintain their resilience, the B to C-grade buildings may face difficulties. Companies are reevaluating their office space needs, with many opting for reduced office usage, favoring flexible work arrangements and remote work. As the trend of employees working in-office three days a week instead of five continues, companies may downsize their office spaces. This transition towards a more flexible work environment is here to stay, and the office market will need to adapt accordingly.
Retail Sector: A Mixed Bag
Turning our attention to the retail sector, the outlook varies depending on location and business type. Overbuilding in some areas may lead to vacancies, prompting property owners to consider alternative uses for their spaces. For example, Monmouth Mall plans to transform its structure into apartments and an open-air mall. Retailers who can diversify their business offerings may fare better, but overall, the retail sector is expected to experience only a minor downturn in 2024, in my opinion.
Inflation and Interest Rates: A Delicate Balance
Inflation has been a significant concern in recent times. However, in the last six to eight months, it appears to have slowed down, aligning with the Federal Reserve’s objectives. Furthermore, interest rates have decreased by as much as one percentage point over the last three months. While we are unlikely to return to the historically low interest rates of the past, I anticipate rates will continue to decline modestly. The new norm may settle around five and a half to six percent, which could drive decision-making among investors and developers.
In conclusion, the commercial real estate landscape in 2024 will see a significant shift in the industrial sector, with increased availability of larger properties and a potential dip in rents. The office sector will need to adapt to the changing dynamics of remote work, while the retail sector may experience minor setbacks but also opportunities for redevelopment. Finally, as inflation eases and interest rates remain favorable, the commercial real estate industry must navigate this delicate balance to seize new opportunities and thrive in the evolving market.
David Zimmel is president and co-founder of Zimmel Associates in Edison, New Jersey.