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Let's look at commercial real estate. This year, 2024, is going to be a mixed bag. Sectors such as office space will struggle more, but in other areas the picture is less bleak and some segments will thrive. The worst is yet to come for the office market.
Office Space
Vacancy rates are expected to rise further, which is worrying considering the national vacancy rate hit a record high of 19.6% in the fourth quarter, and vacancy rates are expected to rise to nearly 21% later this year due to weak demand for space.
While more employees are returning to the office, many continue to work a hybrid schedule, spending some days in the office and some days at home. This allows employers to use less space overall, even as employees return to the office. Hybrid schedules require fewer workstations because employees work in shifts and share common spaces. Also, some metropolitan areas, such as Boston, Houston, Miami, San Francisco, and Washington DC, have not seen a significant decrease in the percentage of remote workers.
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That means 2024 will be a year of office sell-offs: Deep-pocketed private equity funds have $100 billion to buy up distressed office buildings in metropolitan areas like Los Angeles and New York, while office construction and rents are both expected to remain stagnant.
Retail Space
Retail space is poised to have a better year than office. Last year, retail construction grew strongly due to the surprising resilience of the American consumer. Construction has slowed this year, with most of the new space going to suburban shopping centers. Outside of traditional shopping malls, most retail space is seeing rising rents and should hold up.
Industrial Space
The once-booming industrial and logistics sectors will cool, but not freeze up. The pandemic-induced surge in e-commerce, which led to an explosion in demand for warehouses and related space, is now easing. Construction is expected to slow significantly as the overall economy slows. However, rents are expected to maintain 2% growth in 2024.
Data Centres
Demand for data centers will remain strong and outstrip supply, driving up rents. In fact, the rise of artificial intelligence, high-frequency trading, and other data-intensive applications will keep data center demand strong for years to come.
Construction is expected to surpass 2023's high levels, increasing conflicts with neighbors unhappy with data center noise. Omaha, Nebraska; Austin, Texas; and San Antonio are expected to be booming markets given strong local demand and generous tax incentives.
Hotel
This could be a decent year for hotels, which face less leisure travel and competition from cruise ships and short-term rentals like Airbnb. City and airport hotels are expected to fare best, with airport hotels thriving on business travel. Resorts will have another tough year.
Residential
Finally, the residential space will suffer from sluggish rent growth: The recent wave of new apartments hitting the market has not been enough to bring occupancy rates down from their high levels, but rent increases will likely remain low, averaging 1.2% this year.
This forecast first appeared in The Kiplinger Letter, a magazine that has been published since 1923. The Kiplinger Letter is a collection of concise weekly forecasts on business, economic trends and the Washington outlook to help you understand what's coming next and get the most out of your investments and dollars. Subscribe to The Kiplinger Letter.
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