WASHINGTON – AI, operational real estate and office transformation are commercial real estate trends catching Goodwin’s attention ahead of the annual Real Estate Capital Markets (RECM) conference.
After a recent downturn, the commercial real estate industry may have a bright future.
According to investment information website PERE, private real estate investment funds remain very attractive to investors globally, with 39% of investors intending to increase their investments in private real estate this year compared to last year.
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The Federal Reserve could cut interest rates in 2024, making financing more affordable and stimulating real estate development. If this happens, lower borrowing costs could boost the overall economy, which in turn could lead to more business expansion and demand for commercial real estate.
At Goodwin's RECM Conference, co-hosted with Columbia Business School on March 27, real estate industry thought leaders shared their insights on some of the factors driving real estate growth this year and beyond.
Here are some of the real estate trends Goodwin sees as imminent:
Real estate companies embrace AI
A key driver of growth will be AI, especially given the proliferation of generative AI (gen AI) tools, the need for infrastructure and real estate to support AI expansion, and the increasing provision of meaningful data analytics.
According to a 2024 Deloitte survey of global real estate industry leaders, real estate companies are far more likely to invest in AI than other emerging technologies. 72% of survey respondents said their companies are piloting, starting to implement, or in production with AI. In contrast, just over half of companies said they are investing in the metaverse.
Consulting firm McKinsey estimates that Gen AI could add more than $110 billion to $180 billion in annual value to the global real estate industry. Real estate companies and investors are looking to harness its power to dramatically speed up investment decisions, help prospective tenants visualize themselves in properties, and improve customer service.
Investors can tap into the fast-growing managed real estate sector
Operating real estate (OpRE), or real estate investments where management and operational performance directly impacts returns, continues to grow rapidly. OpRE investors might operate hotels, hospitals or senior housing where investment returns are tied to property operations. For example, the financial return on an investment in an aged care facility depends on the quality of care provided.
Many OpRE investments, such as healthcare facilities, are expected to remain strong regardless of economic conditions because they provide services that will always be needed. Others benefit from long-term demographic trends. For example, the aging of the U.S. population will continue to increase demand for senior housing services regardless of economic ups and downs.
OpRE investors are likely to turn to renewable energy as environmental, social and governance initiatives remain a priority for the industry. Hotels, for example, could increasingly turn to renewable energy to appeal to environmentally conscious guests and aid in the transition to a low-carbon economy.
More offices to be renovated
Remote work is still far more common than it was four years ago when the pandemic struck. Perhaps more surprising is that the amount of time people spend working from home is only slightly less than it was two years ago, when the pandemic was still disrupting plans to return to the office, according to a study by Stanford University professor Nicholas Bloom and his colleagues.
The shift to remote and hybrid work has led to higher office vacancy rates but also new opportunities for cities to remodel their downtowns. Many older buildings without modern amenities are likely to be converted into apartments or condominiums, according to commercial real estate investment firm CBRE. The federal government aims to encourage such office-to-residential conversions through grants, low-interest loans and tax incentives.
Office-to-residential conversions in downtown business districts could help offset some of the impact of office vacancies, and are already gaining momentum: CBRE expects roughly 100 offices to be converted to other types of space in major U.S. cities by the end of 2023, up from 56 office conversions in 2022. Nearly half of last year's office conversion forecast was for multifamily projects.
Vacant office buildings also present investment opportunities: Value-add funds can acquire vacant offices and renovate them to increase rental value, according to investment data firm Preqin.
Retail remains strong
As the pandemic eases, American shoppers are returning to stores and restaurants in earnest, but available retail space remains limited, reflecting a dearth of new construction after the 2008-09 recession.
Strong demand combined with tight supply has led to lower retail vacancy rates, helping the industry thrive over the past year despite rising interest rates. U.S. shopping center vacancy rates hit 5.3% in the fourth quarter of last year, the lowest since 2007, according to Cushman & Wakefield Research.
The outlook for retail remains bright, especially for neighborhood stores and suburban shopping centers that are benefiting from the shift to remote work, as more consumers visit stores closer to home during the week.
The outlook for retail remains bright, especially for neighborhood stores and suburban shopping centers that are benefiting from the shift to remote work, as more consumers visit stores closer to home during the week.
Commercial Real Estate Market Defies Expectations
A series of bank failures last spring led some analysts to predict an imminent commercial real estate bust, but no such crisis has materialized, and it may never come to pass.
In one sign that financial stress remains minimal, delinquency rates (i.e., the percentage of commercial loans that are past due) remain historically low, despite rising slightly last year. These low delinquency rates are consistent with other signs of economic strength, including low unemployment and better-than-expected gross domestic product (GDP) growth.
Moody's Analytics analysis said that while some regional banks will still face challenges as maturing loans come due, several factors mitigate banks' risk, including significantly higher rents, lower rates of new construction and less leveraged lending. Additionally, commercial real estate is a diverse market, with some sectors, such as retail, booming.
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