Strategies to score real estate wins in 2024

Property owners, investors adapt to ‘new ball game’ in commercial real estate

2023 was a record year for real estate transactions — unfortunately, not in the right direction.

“At the end of 2023, real estate transaction volume was down almost 60 percent from 2022 and about 70 percent from its peak in 2021, which is an incredible decline,” said Grant Thornton Advisory Services Managing Director Don Davidson, who specializes in real estate valuation. “The cost of borrowing increased dramatically, and higher commercial mortgage rates had a devastating impact on  the industry.”

Property values also saw a decline — almost 12 percent in 2023 and about 20 percent below their peak in early 2022 according to analyst estimates. Despite these trends, however, 2024 shows signs of steadying with opportunities for property owners and investors to find value — but they will likely need to try new tactics. Because, as Davidson said, “it’s a new ball game.”

Commercial real estate seeks to rebuild from the perfect storm

Throughout 2023, the real estate market experienced what Davidson describes as “the perfect storm” of factors affecting transactions and valuation: rising interest rates, inflation, tightening lending standards among banks and changes to tenant needs, particularly in the office sector.

“Transaction volume stalled when loan-to-value ratios fell sharply, and banks began requiring more capital to even consider deals. Furthermore, inflation is causing the cost of operations to increase way beyond what is typical for property managers,” Davidson said. “Combine that with mortgage rates going from 2.75 percent to over 7.5 percent, and suddenly, owners and investors are facing a completely new reality.”

Now, owners are struggling to afford to keep their properties or initiate new loans, and on top of that, they’re having to reevaluate the use of their spaces completely. As a result, there has been a huge spike in delinquencies. And generally, there has been a slowdown in city centers, putting many metro areas in a transactional slowdown.

Toward the end of 2023, interest rates declined from their peak, but they’re still much higher than what has been typical for the market in recent years. Most recently, the Federal Reserve signaled that it is finished raising interest rates but made it clear that it is not yet ready to start cutting rates. Current expectations are for rates to decline in the second quarter of 2024, which should lead to property value stabilization across all sectors.

Diversifying portfolios, making upgrades to add value in 2024

In 2024, those seeking to buy will need to alter their approach to stay afloat, particularly when it comes to office space. Many companies have needed to reevaluate their space needs, so there’s a demand for flexible office spaces. Buyers will likely be able to find opportunities to rehab older buildings or convert them for an alternate use.

Many investors, Davidson added, are diversifying their property targets — for example, going after “last-mile logistics facilities” — the buildings at the end of the distribution cycle that allow us to get our Amazon packages within a matter of hours. Non-traditional real estate, such as gaming properties and cell tower portfolios, is also gaining traction.

For current owners, investing in upgrades and enhanced amenities will also boost their property value. One growing trend is sustainability, which is prioritized by investors and tenants alike.

“Sustainable operations command higher rents,” Davidson said. “If a building can be upgraded to get energy-efficient certifications, it’s in their best interest to do so because they trade at a higher value.”

Technology advancements, like the use of virtual reality in site visits, will continue to impact the industry. Additionally, with the increased cost of operations as a result of inflation, smart-tech buildings are on the rise, increasing operational efficiencies, improving security and enhancing the overall tenant experience.

Even with uncertain market conditions, Davidson said there are reasons to be optimistic.

“Chaos creates opportunity. With disciplined and strategic planning and research, well-funded investors will find opportunities to attain low-cost, high-quality assets in major metro areas,” he advised.