Law Clerk Madison Geiger contributed to this article.
In 2024, the commercial real estate industry is expected to continue to struggle, albeit with some stabilization. This alert focuses on three subsets of the commercial real estate market: retail, office, and multifamily. Each subset has its own outlook. The retail industry is likely to see fewer bankruptcy filings than in 2023, while office space and multifamily distress will increase.
retail
In 2023, several well-known brick-and-mortar stores filed for bankruptcy, including David's Bridal, Serta, Tuesday Morning, Bed Bath & Beyond, Party City, Soft Surround, and Rite Aid. We expect the retail outlook to be more stable in 2024. While the retail industry may be more stable than in 2023, we expect discretionary spending to remain low in 2024 and non-essential retailers to continue to struggle. Discretionary retailers with looming debt repayments, inefficient locations, or weak online presence may be especially vulnerable. Our 2024 “watch list” includes JOANN, Express, Rent the Runway, Petco, and The Container Store.
office
Office space vacancy rates are at an all-time high. Vacancy rates for Class B and Class C office space are expected to continue to rise through 2024. These vacancies will continue to exacerbate the financial distress these entities face with maturing debt. However, Class A office space has maintained occupancy rates and has avoided financial distress as a result. Some areas have converted Class B and Class C office space into residential apartments, but high costs and building structural restrictions make the feasibility of conversion a challenge. Class B and Class C office space will continue to face financial distress in 2024, and creative solutions may be the only option if guarantor liability makes property owner bankruptcy an unreasonable recourse.
Multifamily
Distressed multifamily assets are expected to increase in 2024. Distressed assets are driven by rising debt costs, increasing supply, and slowing rent growth. The cities with the highest loan delinquency rates today are San Francisco, New York, Washington DC, and Houston. Overall, demand for multifamily remains high as urbanization increases, but older multifamily properties are struggling to keep up with newer units, resulting in rising vacancies. With over $1 trillion in multifamily debt maturing by 2028, 2024 could be the start of an avalanche.
The commercial real estate industry has faced challenges since the pandemic disrupted occupancy and introduced new virtual ways of working and playing. What once seemed like a temporary change in behavior has become the new normal as working from home and online shopping have become the norm. The factors that led to a distressed 2024 outlook have been brewing since the pandemic, and the commercial real estate industry will need to adapt to these changes to continue to thrive amid them.