As we stand on the brink of a new year, the commercial real estate and construction industries are at a pivotal juncture, poised for a transformative journey in 2024. Shaped by evolving trends, market dynamics, and global influences, the outlook for these sectors reflects a blend of resilience, innovation, and adaptability.
Industry leaders are often asked to look into their crystal ball to predict trends and share their outlook on how the market will fare in a new calendar year. At Marino PR, a full-service strategic communications firm with a nationally recognized real estate and construction practice, we did just that, surveying a select group of clients across asset classes and geographies to learn more about what the industries’ leading experts are tracking in the year ahead.
Based on our discussions, we can confidently say that the major themes of the last few years—high interest rates, renewed demand for office space, the potential of AI, the increased importance of ESG—will continue to dominate the real estate landscape. But nearly four years after the pandemic, and a little over one since the public launch of ChatGPT, we’re seeing those narratives swerve in surprising ways.
Read on to learn where real estate and construction leaders think the industry is headed in 2024 and beyond.
What are your predictions for the commercial real estate market?
“Over 50 years in the real estate development business, I have learned to look at every crisis as an opportunity,” said Jeffrey E. Levine, Founder and Chairman of Douglaston Development. “The collapse of the regional banks in 2023, coupled with the ever-increasing interest rates, have ravaged the real estate values in 2023. As interest rate hikes seem to have been taking a pause as of late and are anticipated to fall at some point in 2024, I believe that the combination of depressed prices and lower interest rates will create great opportunities in the year ahead.”
“I suspect we are going to see a meaningful increase in transaction activity as the full effects of the rate hiking campaign by the Fed are being felt across our industry and lenders begin to position themselves to force sales of underlying assets by direct or indirect means,” said Ian Bel, Managing Principal and Chief Executive Officer of Olive Tree Holdings, a mission-driven private investment company with a focus on real estate. “We are also likely to see the strong pipelines of new construction deliveries in high growth markets lead to impaired occupancy and rent growth in those markets as those units are absorbed.”
“The industry has a long road ahead,” said Lee Brodsky, Chief Executive Officer of BEB Capital, a real estate development and investment firm with a portfolio of industrial, office, and multifamily properties across the Northeastern US. “Property values have declined over the last 12 months, and I expect that this will continue to decline over the next 24 months. We’re going to see a lot more pain before it gets better, specifically for the office sector. As debt matures, potential issues will come to fruition. The industrial and multifamily sectors will remain strong, while some will experience pain depending on how they were financed.”
“Additionally, credit will remain strong as constraints within credit will continue as the market experiences issues and banks will continue to retreat,” Brodsky added. “The unlevered buyers, those that don’t rely on debt, will continue to win in 2024.”
Frank Dubinsky, Chief Operating Officer of Monadnock Development, a leader in delivering innovative, mixed-use projects, shared thoughts on what he’s tracking in the year ahead.
“In 2024, high debt costs, coupled with reduced demand for office spaces and the absence of rental tax incentives like New York State’s 421a program, will likely limit new supply,” he said. “This may lead to a surge in property workouts, foreclosures and deed in lieu arrangements. Additionally, the increasing costs associated with building affordable housing, encompassing both rising debt and hard costs, are likely to contribute to a reduction in the number of units being constructed, further exacerbating the housing shortage.”
“As we close out 2023, we're now at a point where questioning the future of the office is behind us,” said Ryan Masiello, Chief Strategy Officer at VTS, the industry's only technology platform that unifies owners, operators, brokers, and their customers across the real estate ecosystem. “Year-to-date, we're seeing large tenants, those over 100,000 square feet, back in the market with momentum. Demand is up roughly 83% on a sqft basis. The fact that these large tenants have confidence in offices is reactivating momentum in the market. And this goes beyond the finance and banking sectors—, all industries are making a shift back to the office market.”
“A continuation of the current commercial real estate slump, most specifically in capital markets. The rapid rise of interest rates has crushed commercial real estate values, and you are seeing even extremely well-leased properties going up for sale, REO and/or receivership,” said Ben Berman, President of BermanCRE, a subsidiary of Berman Enterprises and third-party commercial real estate brokerage and advisory firm.
“Our expectation is volatility and price discovery will continue for at least the next 12-18 months. Even if the Fed does announce that they are done raising rates (and based upon recent data and announcements, that may be the case soon), the most likely scenario is that they would maintain rates for at least two consecutive quarters to see how the effect on inflation and overall market conditions,” added Berman. “It will be harder and harder for owners to sell and/or refinance their properties at valuations that fit their business plan, especially those with shorter-term floating debt. More likely will be the need for significant investment by outside parties coming at a premium cost or handing over the keys altogether to lenders.”
What are some newer trends/storylines you’re tracking in the commercial real estate industry in the year ahead?
“We are observing a resurgence of in-office work, with many employers leaning towards three or more days of in-office requirements,” said Dubinsky. “As a response to growing certainty in the return to regular office attendance, companies appear to be looking to improve the quality of their offices – choosing alluring neighborhoods with great local amenities and access to outdoor space to create a balanced work-life dynamic. Our 300 Huntington project in Gowanus/Carroll Gardens perfectly exemplifies this shift, offering a flexible, conveniently located space with abundant natural light and access to Brooklyn’s vibrant creative community.”
“Given the significant shift in office values over the last year, buyers are back in the market taking advantage of highly competitive deals,” said Nick Romito, Chief Executive Officer of VTS. “People have been talking about the influx of buildings going back on the market, but no one is talking about the buildings getting snapped up at good rates and they see how valuable they will be in the future."
“Another trend I am tracking is back to the office,” Brodsky added. “I believe we are heading towards a recession, forcing us to revert to the older way of doing things. A potential recession will drive employees back to the office because they will feel the need to be more present.”
Bel also shared his thoughts on trends and storylines he’s tracking in the year ahead.
“As operators continue to face major headwinds in the lending market, they are likely to continue to look for creative strategies to reinforce their asset level balance sheets,” he said. “Those strategies will likely include adding new flexible capital partners and greater technology adoption to reduce operational expenses and infrastructure overhead. Insurance pricing is also a storyline that our market is watching closely and how to design insurance programs that help offset the broad rise in insurance pricing across our industry.”
How will artificial intelligence (AI) continue to disrupt the construction and commercial real estate industries?
“As the construction industry expands its understanding of AI, it’s also going to evaluate its potential through a pragmatic perspective,” said Danielle O’Connell, Senior Director, Emerging Technology at Skanska USA Building, a leading global construction and development firm. “There is a fundamental disconnect between the ‘move fast and break things’ culture of the technology industry and the risk-averse realities of the construction industry. The AI bubble is going to start unraveling, but construction will gravitate to the use cases where it delivers immediate value.”
AI grabbed headlines this year and we can expect that to continue in 2024, says Michael Zeppieri, Vice President, Emerging Technology at Skanska USA Building.
“AI will continue to be the primary focus of discussion, interest, skepticism, and unrealistic expectations in 2024. While robotics and digital twins will crest the hype curve, AI is rapidly accelerating to the top of it.,” said Zeppieri.
"Utilizing artificial intelligence will enable the commercial real estate sector to build a data advantage with comprehensive databases and more real-time insights while saving hours of professional time to focus on value-add work, says Mike Sroka, CEO and Co-founder of Dealpath, the industry’s most trusted, purpose-built real estate platform, empowering hundreds of today’s leading institutions to invest digitally in the built world.
“AI can also help address a fundamental challenge for the industry of the current lack of standardized data and related workflows,” Sroka said. “To date, real estate has been a ‘document-heavy’ business. Huge value has been trapped in these documents and can be unlocked by enabling information within them to be more easily reusable and transferable through the use of AI solutions.”
What appetite will venture capitalists have for Proptech investments?
“VCs will be even more popular in 2024 than they were in 2023,” said Sroka. “It looks like an amazing time to be an investor with fresh capital to deploy. The pendulum has swung to an investors market, and investors with fresh capital will be selective and patient with higher expectations for business traction, efficiency, and transparency, along with lower valuation multiples and more protective provisions. That said, many companies that are undercapitalized and/or burning cash that have held out over the past 18 months of tightening will be forced to seek capital despite this more challenging environment.
“With continuing reduction in the cost of more sustainable building technologies, we are focusing on seamlessly integrating all-electric buildings, geothermal systems, and solar arrays into our projects,” said Dubinsky. “Moreover, we’re proactively championing these technologies, positioning ourselves as leaders before they become standardized, aligning with our long-term vision. Finally, our emphasis on Minority and Women-Owned Business Enterprises (MWBE) contracting and local hiring, particularly for affordable housing initiatives, underscores our commitment to inclusive development.”
“Real estate will continue the journey and maturity model to establish standards of ESG measurement and reporting which will increasingly be utilized in valuation, underwriting, appraisal, and investment mandates,” Sroka said.
“At Dealpath, we consider Diversity, Equity, and Inclusion (DEI) to be an important consideration when developing a team with diverse backgrounds and experiences,” Sroka added. “This approach helps us find the best solutions, fosters innovation, and encourages a well-rounded, collaborative team that is more effective as a cohesive unit rather than as individuals. We’ll continue to see candidates from diverse backgrounds and create programs where DEI is a value driver.”