Future-Proof Your CRE Portfolio: 10 Essential Trends Developers Should Watch (2024)

The CRE market is unpredictable but developers who stay informed will ride its waves.

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Ask any top property developer the secret behind their success and they’ll probably mention staying up to speed with commercial property market trends.

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Dynamic, unpredictable, but always entertaining, the CRE industry can conjure surprises that knock even the most experienced entrepreneurs off their stride. 

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Yet, the most successful developers are those who weather these blows by equipping themselves with a commercial real estate analysis of current trends.

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So, where to start? Well, the best time is right here, right now.

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Read on to find out which commercial property market trends are taking hold in the American real estate market today, from interest rates to ESG imperatives.

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Let’s take a closer look.

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The 10 commercial property market trends you should look out for 

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Keeping an eye on current commercial real estate trends is a must for every investor and developer, but it’s hard to keep track of the various goings on, especially in the busy US market.

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To help, here are the 10 commercial property market trends to watch out for.

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1. Commercial prices are stabilizing

2022 must seem like a long time ago for some people. 

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Prices dropped 7% year-over-year between April 2023 and April 2024, according to  Green Street's Commercial Property Price Index, marking a 22% drop since the same point in 2022.

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Industrial properties showed some resilience, with a 1.9% year-over-year increase, but the office sector was hit hard, experiencing a staggering 15.2% decline.

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Yet there are signs that this downturn is behind us. The index was unchanged in July with prices showing to have stabilized for this year.

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Peter Rothemund, Co-Head of Strategic Research at Green Street points to shoots of optimism by saying “For most property types, values are modestly higher than they were at the beginning of the year.”

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                                          Source: Green Street

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How can developers benefit?

The obvious takeaway here is that savvy developers who identify undervalued real estate assets can snap up bargains before the market rebounds, but they’ll need to keep a close eye on forecasts.

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2. Higher-for-longer interest rates

Anyone with a passing interest in the economy will be well-versed in the Federal Reserve’s ongoing battle with inflation which has to higher-for-longer interest rates. 

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For commercial real estate developers, it has been a double-edged sword.

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The impact on commercial real estate has been widespread, affecting everything from property valuations to CRE financing.

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On the one hand, high interest rates have made debt financing more expensive, putting pressure on property valuations and reducing investor returns. 

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On the other, they have also created opportunities for those with the capital to acquire assets at potentially discounted prices.

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Victor Calanog, Global Head of Research and Strategy, Real Estate at Manulife Investment Management has noted this, saying “In this higher-for-longer rate environment, buyers, sellers, and capital sources are going to come to the table ready to do deals”.

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How can developers benefit?

The challenge for CRE developers is to make the most of these conditions by managing this balance between expensive lending and cheaper investments. Those who do will be in a better position to pounce on opportunities as the market rebounds.

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3. Rental growth is strong across most major CRE sectors

Rental income is proving resilient despite the challenging price market.

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Multifamily properties have weathered the storm, posting a solid 0.7% rent growth, according to the latest NAR report, even as vacancy rates climbed to a 10-year high of 7.7%. 

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The industrial sector continues to be a standout performer, with rents surging 5.5%. Even retail has shown surprising strength, with a 3.2% increase and a low vacancy rate of 4.1%.

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However, the office sector remains under pressure, with minimal rent growth of 0.7% and a record office vacancy rate of 13.8% thanks to the remote work boom.

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How can developers benefit from this?

While these figures offer a snapshot of the current market, things can change quickly.

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Developers must always keep an eye on other economic indicators like interest rates, inflation, employment figures, and consumer spending to make informed decisions.

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4. “Flight-to-quality” is still on the rise…for now

Part of the reason for the pressure on the office sector is the “flight-to-quality” trend where investors flock toward high-quality premium office buildings, leaving less desirable spaces behind. 

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These Class A spaces represent a mere 10-15% of the total market but boast impressive occupancy rates below 11%. Asking rents are much higher than for other office spaces, putting them in high demand.

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Yet there are signs this trend may reverse. 43% of Class A or A+ were sold for less than their purchase price, according to a recent report from Globest, compared to 19% and 13% of B- and C-rated office properties respectively.

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How can developers benefit from this?

Things may look good in the premium office space, but commercial real estate investors must exercise caution: what's trending today might not be tomorrow. Diversifying portfolios across property types and geographic locations can help mitigate risk.

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5. Multifamily is diverging

The multifamily sector is experiencing a period of divergence. 

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Overall rent change has moderated to 2.7%, according to analysts ResiClub, reflecting a maturing market, and the sector is punctuated by various sub-trends.

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Source: ResiClub

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These sub-trends include

• An increased supply: A 20% surge in new multifamily unit deliveries has contributed to a 10-year high vacancy rate of 7.7%.
• Shifting demand: Renters are leasing more Class B properties, with absorption share moving from Class A to Class B.
• Geographic disparities: While overall rent growth has slowed, markets like Rockford, IL, Kingsport, TN, Salinas, CA, and Youngstown, OH have bucked the trend with impressive rent increases, according to NAR.
• Strong performance in key metros: Major cities like New York, Dallas-Fort Worth, Washington, DC, Phoenix, and Houston continue to exhibit robust demand for rental housing.

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How can developers benefit from this?

The multifamily sector is experiencing a tale of two cities. While some markets are thriving, others are facing headwinds.

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To succeed, investors should adapt their strategies to changing market conditions as they happen.

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6. Industrial real estate is cooling down

The industrial real estate sector, once a high-flying star, is showing signs of cooling. 

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The breakneck pace of growth seen during the pandemic, fueled by a surge in demand for warehouse and distribution space, is beginning to slow. Increased supply, coupled with a normalization of e-commerce activity, has led to a rise in vacancy rates (from 4.1% to 6.1%)  and calmer rent growth (from 10% to 5.5%), according to NAR.

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Despite these challenges, the industrial sector is still a robust real estate investment area. E-commerce rose to 15.6% of total retail sales in the first quarter of 2024, meaning warehouse space is still highly in demand.

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                               Source: US Department of Commerce 

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How can developers benefit from this?

While still a strong investment, industrial developers should be cautious and focus on strategic locations and value-add opportunities over the next 12 months.

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7. The decline of malls brings repurposing opportunities

The rise of e-commerce has brought huge commercial real estate challenges for traditional brick-and-mortar stores, but this presents opportunities for innovative developers and investors.

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Repurposing struggling shopping centers has become a popular strategy. Developers are converting vacant retail properties into residential units, offices, or entertainment venues within mixed-use developments. 

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It’s an approach that addresses the housing shortage and is more eco-friendly as it eliminates the need for construction on new greenfield sites.

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How can developers benefit from this?

Converting vacant retail space into residential units, offices, or entertainment venues not only generates new revenue streams but also revitalizes neighborhoods.

Repurposing existing structures also often requires less building work, which reduces costs and environmental impact compared to new construction projects.

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Developers who plan and execute their projects carefully will find that mall repurposing is one of the most profitable ventures out there.

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8. ESG Takes Center Stage

Sustainability is no longer a buzzword; it's business critical. 

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ESG (Environmental, Social, and Governance) factors have turned from a trend into a mandatory factor for real estate investors and developers, who must now prove that they meet energy efficiency and social impact requirements. 

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What’s more, the US Securities and Exchange Commission recently put forward a rule requiring publicly traded investors to publicize their transition plans to net-zero emissions.

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Sure enough, this has had a valuable impact on the CRE industry. Properties with strong ESG credentials now command premium valuations and attract a wider pool of investors. Almost 80% of CRE investors now adopt criteria, according to PGIM Real Estate research.

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                             Source: PGIM Real Estate 

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 How can developers benefit from this?

As the regulations continue to tighten, it's clear that ESG is here to stay. Embracing sustainability is now a strategic business decision that every developer must consider.

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9. Technology's Impact

Technology advances are shaping the world we live in, including a commercial real estate industry that’s set to see some radical Proptech innovations.

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Developers have already started to use tools that were unavailable just a few years ago including:

• New data analytics help identify prime locations, assess market demand, and inform project designs.
• Property management software improves efficiency, reduces waste, and ensures projects are completed on time and within budget.
• Leveraging virtual and augmented reality tools is one of the commercial real estate marketing trends that developers are noticing. They improve sales efforts by attracting tenants and buyers with VR and AR viewings.

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How can developers benefit from this?

As the property sector becomes increasingly tech-driven, CRE professionals must embrace digital transformation to stay competitive. Many companies now offer new training courses and initiatives designed to get people up to speed with this revolutionary tech.

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10. A lending boom is on the horizon 

A staggering $2 trillion in CRE debt is set to mature over the next three years, and lenders are poised to capitalize with a wave of new refinancing and lending opportunities.

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Private credit firms and other non-traditional lenders are stepping into the breach, offering alternative financing solutions for property owners. This increased competition is likely to drive down borrowing costs and expand financing options for developers.

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However, the influx of new lenders could also intensify competition for quality deals. Developers will need to have well-prepared projects with strong financial fundamentals to attract the best financing terms. They’ll also need to have sufficient liquidity to cover the likes of earnest money deposits and closing costs that can make or break deals.

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How can developers benefit from this?

Building strong relationships with lenders and having this financing ready, especially during periods of market volatility, will be a key competitive advantage over the next few years.

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The advantages of developing commercial real estate right now

The commercial real estate market has experienced its share of challenges, there are compelling reasons for developers to seize opportunities over the next 12 months.

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Central to this is an expected uptick in investment volume, to the tune of 5% in the United States of America, according to CBRE’s latest commercial real estate outlook.

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Here’s a summary of how developers can benefit from the current CRE market.

• Acquisition opportunities: Declining property values and increased distress sales can create attractive acquisition opportunities for developers with financial resources and risk appetite.
• Land value appreciation: In many markets, land values have remained relatively stable or even increased, which presents a potential upside for development projects.
• Pent-up demand for commercial: Despite economic uncertainties, underlying demand for commercial space, particularly in sectors like industrial and multifamily, remains strong.
• Government incentives: Some regions offer incentives and tax breaks to encourage development, which can boost project profitability.
• Technological advancements: Innovations in construction technology and materials improve efficiency and reduce costs, making development projects more feasible
• New lending possibilities: A restricted financing market has created space for alternative lenders that offer specialized products and services. 

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Making the most of commercial property market trends like these is not just a smart way for an entrepreneur to build a development portfolio and achieve long-term success, but it also helps them stay ahead of the competition who are lagging behind. 

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Brushing up on market trends is the first step; securing quick funding is the next. Contact Duckfund to find out how our Sign Now Pay Later approach can help you grow your portfolio.