The state of CRE: A look back at Q4 2023

With the release of their first look at 2024 trends, the U.S. Real Estate Market Outlook report, CBRE paints a picture of slow recovery finally turning bullish. But don’t pop the champagne yet—the predictions follow a particularly troublesome 2023 Q4 that saw almost every real estate benchmark of volume and investment spend fall. In a way, there may be little place to go but up.

Here’s where the CRE industry finds itself going into 2024.

U.S. real estate investment volumes continued their downward trend in Q4, falling 44% year-over-year to $81 billion. Driven by the rising cost of capital and volatile financing conditions, annual volume fell by 52% to $348 billion—the lowest annual total since 2012.

Even as multifamily maintained the largest share of total commercial real estate investment volume (~32%), actual investment volume dropped to $25.7 billion in Q4, an astonishing 51% decrease from Q4 2022. Industrial and logistics fell almost 46% to $19 billion, and office investment volume fell to $14 billion in Q4, a 33% drop from Q4 2022.

Moody's Analytics described the office market as "uncharted territory." By the end of Q4, the Mortgage Bankers Association reported that missed payments on loans backed by office properties rose to 6.5%, up from 5.1% in Q3.

According to Cushman & Wakefield, a fifth of U.S. office space was vacant during Q4 2023, an all-time high. More than half of the respondents to CBRE’s 2023 U.S. Office Occupier Sentiment Survey said they plan to further reduce their office space in 2024. Capital Economics forecasted that this lackluster demand, coupled with high enough interest rates, could drive an additional 20% drop in prices for office buildings in the new year.

All these factors deter developers from breaking ground—the 36.1 million sq. ft. in total construction completions expected in 2024 would be the lowest annual amount since 2014.

Meanwhile, these metrics have led CBRE to speculate that buildings lacking modern amenities will struggle even more to attract tenants, thus making them more likely to undergo conversion to other uses.

The prevailing assumption is that interest rates peaked in 2023, and there’s nowhere to go but down. While the Fed is expected to start lowering interest rates later in 2024, many bank executives still worry about their mortgages—and with good reason. The Trepp Commercial Mortgage-Backed Securities (CMBS) Delinquency rate for all commercial properties ended December at 4.51%—a substantial jump from 2.94% in January 2023, with office remaining the most troubled sector.

As reported by S&P Global in May 2023, nearly 600 US banks had exceeded regulatory guidance on CRE loan concentration, a 30+% increase over the previous year.

FitchRatings noted: “While overall refinancing activity in 2023 was better than anticipated, refinancing rates for office, multifamily and industrial progressively declined in the last six months (of 2023), indicating mounting challenges.” Specifically, of all bank mortgages held across multifamily, retail and industrial spaces, “just 46%-48% would be able to refinance in 2024.”

Some securities investors have even shorted regional banks, betting those banks’ stocks will fall due to the expensive interest coupled with the massive loans supporting the troubled commercial market. “As long as interest rates stay high, it's hard for the banks to avoid problems with CRE loans," William C. Martin of Raging Capital Ventures told Reuters.

As rough as the Q4 numbers may feel, the recession economists have fretted about since 2022 is unlikely to manifest at this moment. The so-called “soft landing” comes as some relief, even if the markets don’t start to see an upturn until midyear.

CBRE U.S. Real Estate Market Outlook report predicted that inflation would drop to 2.7% by midyear, a sizable drop compared to the 9.1% of June 2022. As of mid-February, the Federal Reserve Bank interest rates sit at 5.5%, which they also predict will drop to 4.25% by the end of 2024. As cash becomes cheaper, the pressure eases on lenders and borrowers alike, and property values should stabilize by midyear as well.

Of course, there are a lot of “ifs” in these positive scenarios—if cash becomes cheaper, if inflation continues to drop, if regional banks stay liquid. But we’re feeling hopeful for 2024, just like CBRE.