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Laying the Foundations for Future Success

The themes and trends that will matter for US real estate in 2024.

Despite the challenges real estate fund managers faced in 2023, signs are emerging of an improving environment for the asset class. We take a look at relevant macro trends, touch on sector-specific insights, and offer our view on why the outlook may well brighten for the industry in 2024.

Macro trends

The economy: Although the pace of US economic growth has slowed recently, it is again proving resilient thanks to still-strong consumer balance sheets, ongoing wage growth and continuing healthy levels of employment. However, with consumer spending growth expected to slow further, sectors such as retail will continue to face challenges in 2024.

Interest rates: High interest rates have contributed to reducing the attractiveness of real estate as an investment over the last 12 months, with investors turning to ‘safer’ assets such as bonds. However, inflation indicators are settling down and at its January meeting the Federal Open Market Committee confirmed its readiness to cut rates in 2024 once officials are confident it is moving sustainably towards 2%. Once rates start to fall, investors are likely to increase their exposure to real estate in pursuit of more attractive returns. Lower borrowing costs should also help to stimulate the market in the second half of the year.

Construction levels: Rising material and labor costs have kept new building low in many regions and sectors, keeping the supply-demand balance healthier than it might otherwise have been for asset owners. As costs stabilize this may stimulate new building, but this will take time to filter through to the market.

Fundraising: A flight to ‘quality’ has benefited larger, well-known firms, but has made fundraising more difficult for smaller firms. The overall number of real estate funds closing dropped dramatically in 2023, decreasing from 437 in 2022 to 198 in the first nine months of the year1.

Deal activity: Market uncertainty meant few deals were struck in 2023. According to Preqin, at the end of the third quarter of 2023 the total value of US real estate deals had fallen by 58%, while the number of transactions had nearly halved2. The increased risk associate with the asset class also led to smaller Individual deal sizes. However, as the market starts to look more solid in the second half of 2024 and well-capitalized funds seek to put dry powder to use, deal activity is expected to pick up.

Bid-ask spreads: Higher interest rates, combined with the lack of completed transactions to compare against, caused disagreement on pricing in 2023. Although buyers were actively pursuing deals, the higher-interest environment meant they sought discounted prices. However, apart from some forced sales, most sellers preferred to keep hold of their assets and wait for the market to pick up. As rates start to come down and deals start to flow in the second half of 2024, bid-ask spreads are expected to narrow.

Regionality: Local variations in real estate market performance look set to be a continuing feature in 2024. Factors affecting regional performance include desirability, affordability, changing lifestyle preferences, job availability and tax regimes for individuals and businesses. The ongoing population shift towards cities also continues to be a key trend, while the greater mobility for both staff and employers made possible by the work-from-home model is also a factor. Nashville, Miami and Las Vegas should continue to show strong performance for office space, and high-end retail is likely to continue to do well in resort markets such as Las Vegas and Honolulu. Meanwhile, the evergreen standouts of New York City and Boston should continue to outperform in the residential sector.

Relocation: This is likely to be an ongoing trend, with companies moving to areas that are cheaper, offer more friendly local tax and business regimes, have better labor availability, or provide more attractive live-work-shop amenities. Securities and Exchange Committee filings show that 593 US-based corporations moved their headquarters in the 2022-23 fiscal year, the highest rate since 20173.

Strategies: Opportunistic strategies performed best in 2023 and should continue to do well in 2024, with opportunities coming from a range of factors:

  • The funding gap created by banks’ risk-off approach keeping them out of the market
  • Bargain prices for less desirable older assets that may have potential for refurbishment or change of use
  • Distressed sales of properties financed with floating-rate debt
  • Forced sales by core open-ended funds with structures that provide liquidity to investors as investor interest shifts elsewhere

Sustainability: ESG has been a growing trend over the past few years and despite a backlash in some quarters it will continue to impact markets in 2024, particularly in commercial real estate. Companies and organizations will seek newer, more efficient business premises as they strive to meet ambitious corporate sustainability targets, with some even relocating to gain access to renewable power.

Sector trends: what’s hot and what’s not

Operational real estate: Subsectors such as student accommodation and senior living centers will continue to grow in popularity thanks to the potential additional revenue streams they offer. This sort of operational real estate is attractive but requires sector-specific operational experience. Demand for senior living in particular will be a long-term trend; the United States Census Bureau predicts that by 2030, 73.1 million people, or 1 in 5 American citizens, will be of retirement age, while by 2060 the figure will have surged to 94.7 million4.

Data centers: As demand for office space falls, data centers offer an alternative investment for real estate funds. Demand is set to grow significantly as the use of AI and machine learning increases rapidly across sectors. With supply constrained, this will keep pushing up rental rates. However, centers have a huge appetite for both the free flow of data and electricity, making available broadband network capacity and access to (preferably green) electricity key factors.

Industrial and multifamily assets: These subsectors are popular among investors due to relatively strong fundamentals. The supply-demand balance for industrial real estate is expected to remain healthy, although local conditions may affect this. A significant increase in new apartment supply will slow rent growth for multifamily properties.

Logistics assets: Having overheated somewhat post-pandemic due to the rapid growth of online retail, the market for logistics assets should start to come back into balance in 2024. Central Texas and the Mountain West are key hubs, thanks to their geographical location and effective transport links via road, sea and air.

Healthcare and storage: Demand for both these subsectors is largely non-cyclical, so should remain robust as the economy cools.

Retail: Despite the ongoing decline of traditional retail and the growth of online shopping, the subsector should retain strong fundamentals due to the impact of high costs on the lack of recent new construction. However, lower consumer spending may have an impact if the economy slows down more than expected.

Hotels: The hospitality industry faces headwinds to revenue growth in 2024. The slowing of the global economy could affect consumer spending on travel and leisure, reducing inbound tourism. The continued growth of Airbnb-type alternatives will also have an impact. Nonetheless, an increase in domestic tourism due to Americans not holidaying abroad could give the sector a boost.

Office space: Working from home will continue to depress demand for office real estate, particularly in larger cities. According to PwC, downtown office vacancy rates increased 73% between Q4 2019 and Q2 20235, and industry experts predict around a fifth of downtown office space could be vacant by the end of 2024.

Older, less efficient offices with poorer facilities will be harder to let, particularly in less desirable locations. However, lack of new construction will keep demand for newer, well-located, better appointed and more efficient office space healthy.

Rents remain high in relation to demand, and tenants looking to lower total cost of occupancy may seek reductions. With partial home working typical, many businesses will also be looking at right sizing for their office real estate portfolios in 2024. For the same reason, the popularity of more flexible leases and adaptable workspaces is likely to be another growing trend.

Finally, WeWork’s ongoing financial difficulties have implications for the wider office real estate market. With the company looking to renegotiate rents on their considerable volumes of office space , broader rental values could suffer – particularly in larger cities like New York (WeWork rented 5.3 million square feet in Manhattan in 2018). Similarly, if the firm is forced to get rid of space, that could bring down asset values.

How JTC can help you

While the real estate sector in 2024 looks somewhat more promising for fund managers, insight, preparedness, focus, flexibility, and timing will all be important to make the most of the improving environment.

Partnering with the right third-party provider will mean you know your ongoing administrative services are in safe hands and everything will be put in place to ensure your transactions reach completion, whatever the timeframe. That allows you to focus on what you do best: identifying opportunities and closing deals.

Over the past 35 years, JTC has developed considerable expertise in the real estate space, with over US$54 billion of assets under administration. We provide the highest standard of professional administration, accounting, and investor reporting services, as well as purpose-built solutions for Opportunity Zones focusing on Impact Investing and ESG.

Our dedicated teams of experienced staff have extensive knowledge of the real estate market. Together, they can provide highly specialized support to assets held in structures ranging from active large developments to dry single tenant investments and covering uses including student housing, care homes, industrial, retail, hotels, office space, residential and mixed use.

Get in touch with Harold directly to find out more about how we can help your business.

1Preqin Global Report 2024: Real Estate
2Preqin Global Report 2024: Real Estate
32023 Study: Corporate Relocation at Highest Rate Since 2017. Published by Hire A Helper, 13 June 2023. https://blog.hireahelper.com/2023-study-corporate-relocation-at-highest-rate-since-2017/
4Demographic Turning Points for the United States: Population Projections for 2020 to 2060. Published by the United States Census Bureau. https://www.census.gov/content/dam/Census/library/publications/2020/demo/p25-1144.pdf
5Emerging Trends in Real Estate 2024. Published by PwC. https://www.pwc.com/us/en/industries/financial-services/asset-wealth-management/real-estate/emerging-trends-in-real-estate.html
6‘WeWork Struggles to Amend Leases as Landlords Seek Clarity on Restructuring Plan’. Published by the Wall Street Journal, 22 January 2024. https://www.wsj.com/articles/wework-wrestles-to-amend-leases-as-landlords-seek-clarity-on-restructuring-plan-00f88584