January 8, 2024
Commercial Title Market Review
This time of year, there is seemingly no end to the various economic soothsayers looking into their crystal ball to see what the next year holds for commercial real estate. There are some good signs. For example, what appears to be some stability in interest rates, and continued strong consumer demand coupled with historically low unemployment. These things bode well for the 2024 CRE market.
Taking a trip back to the end of 2022, many thought that 2023 would be a challenging year, with rising interest rates, stubborn inflation, and a consensus that we would be entering into a recession. Along with the “mild” recession and associated layoffs, we would see rising unemployment. We did indeed get some of it right, but we also got some things very wrong. It was a challenging year, with commercial transactions decreasing by more than 50% (as of this writing). We also experienced four interest rate hikes in 2023, bringing the Federal funds rate to 5.50%; a 22-year high. Inflation has been sticky, but those rate hikes seem to have done the trick in the latter part of the year and the most recent annual inflation rate for the US dropped to 3.1% for the 12 months ending in November 2023, compared to 3.2% the month prior and a high of 9.1% as of June 2022.
But what about that universally predicted recession and rising unemployment? Defying expectations, the US had real GDP growth in 2023. I think this is a testament to the resiliency of the US economy, coupled with continued government spending. And it paid off, with unemployment staying below 4% for 22 straight months; a run not seen in more than 50 years. However, those interest rate hikes along with the pandemic-induced work-from-home/hybrid work trend and mountains of CMBS loans coming due together significantly hampered the CRE market in 2023.
So where are we going in 2024? History indicates that once the Fed ceases its interest rate hikes, CRE returns will go back into positive territory. Additionally, REITs and Private Equity funds have raised significant capital to take advantage of what they perceive as market volatility and dislocation in the CRE market. This should lead to increased transaction volume for office properties, many at reduced valuations. There is resilience in the retail segment, particularly in the suburban markets, with new leases and lease renewals holding up at the end of 2023. Data Centers have shown strong demand in the second half of 2023, and this trend should continue into 2024. There is some strength in the hotel segment since the return of business travel and record post-pandemic vacation travel. However, challenges persist in other segments, particularly in the industrial and multifamily segments.
If we have learned anything about predicting where the market will go in the coming year, it is that we won’t get everything right. That said, I am optimistic, as many positive factors are pointing to a better CRE market in 2024.
Executive Vice President
National Commercial Title Services