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.‎

If you desire assistance with your commercial real estate and land use needs, Schwabe is ‎here to help. Contact Julie Wilson-McNerney at JWilson-McNerney@schwabe.com or (206) ‎‎407-1516.‎

This article summarizes aspects of the law and does not constitute legal advice. For legal ‎advice for your situation, you should contact an attorney.‎

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