Commercial Real Estate Market Report: Q3 2024

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The much-anticipated Fed rate cut finally happened in September with the board surprising some with a 50-basis point reduction. On the heels of this announcement, the major stock market indices have trended upwards and the latest job numbers were surprisingly strong with the unemployment rate reversing recent trends and decreasing.

The U.S. economy has continued to remain extremely resilient. Headwinds and threats in commercial real estate, however, remain present.

Key takeaways

• Multifamily housing: Although the multifamily real estate sector continues to face operational challenges in the form of stagnant rental rates and increasing operating expenses, trends are improving. Going forward, there will continue to be difficulties, particularly on a localized basis. However, investors view these issues as navigable, and the long-term fundamental outlook of the sector is strong, as evidenced by rising investment activity. We believe fundamentals are beginning to normalize and should be in position for a positive turn in 2025.
• Office: On one hand, office foot traffic has improved with young professionals seeking in-office opportunities for career growth, mentorship and social interaction, but on the other hand, office vacancies remain at all-time highs, near 14%. The signs of an office sector recovery remain stubbornly mixed, leaving lingering questions around additional rate cuts. Will they occur? If so, will they arrive in time for distressed owners to take advantage before foreclosures or will other workouts be required?
• Retail: The retail sector remains fundamentally strong overall, but some retailers are experiencing financial distress as consumer spending shifts away from discretionary items. Although luxury retail has proven resilient to the broader shift in consumer spending, these trends might put some pressure on certain pockets of retail real estate.
• Industrial: The third quarter of 2024 was a balancing period for the industrial segment as tenants migrated to fill the influx of new construction which has flooded the market since the pandemic. Vacancies and rents, while still healthy, struggled to gain any positive momentum against a backdrop of heavy supply. New construction starts have dropped precipitously over the past year which is a good sign for the sector and will likely tighten vacancies as well as invert the national rent growth curve back into positive territory in 2025.
• Capital markets: Whether we see another rate cut by the Fed or not, we believe that investors are confident that interest rates have peaked and are likely moving downward. Considering recent history, the decision to adjust rates will likely be closely correlated to the key economic indicators of unemployment and inflation. As more time passes and investors have had more time to adjust to the new environment and address their balance sheets, we are confident that the whispers of activity in the market now will build to significantly more robust activity.
• Data Centers: Modern data centers, which enable our enhanced technological lifestyle, are becoming an increasingly attractive real estate investment. Fueled by the growth of cloud services, AI and big data, the demand for modern data centers is surging rapidly, drawing more and more capital to the sector. Investments in data centers with sustainability initiatives are expected to deliver robust long-term returns.

For further analysis of the third quarter, download our latest report.

For more information on this topic, or to learn how Baker Tilly specialists can help with your real estate and infrastructure needs, contact our team.