Event Recording

What is the outlook for construction costs?

Construction costs may increase 3% to 4% but are not likely to fall now that a recession will probably be avoided. China’s economic slowdown may help reduce commodity prices. CBRE’s latest Construction Cost Trends report provides greater detail.

How can inflation be tamed as the Fed prints money to pay interest on the $34 trillion national debt with no plans by Congress to curb spending?

Inflation has many causes that can vary over time, but at heart it’s about aggregate supply and demand. Most of the recent bout of inflation since 2022 has been due to the pandemic-related disruption of supply chains. These supply chains are now working at pre-pandemic levels and inflation is falling. By some measures (quarter-over-quarter annualized PCE), inflation is down to 2%.

While pandemic-era stimulus boosted demand at the same time that supply chains weakened, the main cause of inflation was attenuated supply. The Fed has never really printed money to the same extent as in some classic past inflationary periods, such as in Germany under the Weimar Republic. But it has bought government securities to reduce the interest rate and boost demand. It did this during the Global Financial Crisis and the pandemic. Since June 2022, the Fed has been reducing its balance sheet, which has contributed to the rise in the 10-year Treasury yield. So the Fed has played only a minor part in rising inflation.

We are left with a federal deficit of approximately 7% of GDP and no near-term plans to reduce it. Part of the rise in the deficit in 2023 was due to a shortfall in taxes. Capital gains tax revenues were down due to fewer real estate transactions. Several states were allowed to file taxes late due to natural disasters. So while some of the deficit will come down naturally, it is likely that in an election year there will be more spending. We do not think the Fed is under pressure to buy government debt to fund the deficit and if it were we think it would resist strongly.

Action will have to be taken to reduce the federal deficit at some point, but there currently seems to be a reasonable level of global demand for U.S. sovereign paper. It is the risk-free asset of choice in the global economy. Inflation is headed back to 2% to 3% as the effects of pandemic stimulus fade and supply chains operate as normal.

What is the outlook for an end to the yield curve inversion?

The yield curve will normalize in 2025.

What effect will China’s shadow banking problems and Russia’s labor shortage have on the European and world markets and the climb out of recession?

Since Russia is a relatively small economy in nominal GDP terms., its labor shortage will have little impact on the global economy. China’s troubled housing market is a much bigger risk to the global economy in the next few years that could limit global economic growth. China accounts for about 30% of world growth, so a significant slowdown could affect stock markets and consumer confidence, perhaps causing a global recession.

If the Fed makes only one interest rate cut this year, how would this affect the 2024 outlook?

We think there will be 75 to 100 basis points (bps) of interest rate cuts this year, while the market expects 150 bps. If rate cuts total less than 75 bps and if inflation continues to fall, the chances of recession are greater because higher real interest rates will take a toll on consumer and business spending.

What are your interest rate predictions for 2024, 2025, 2026 and beyond?

As inflation falls and economic growth returns to its long-term trend of 1.8%, we expect interest rates will fall to 4.5% this year, 3.3% in 2025, and 2.5% in 2026. This assumes that there will be no change to average productivity growth of 1.5% over the past 10 years. If advances in artificial intelligence drive up productivity growth and capital investment, then these interest rates may be up to 100-bp higher.

How do you reconcile the general sentiment that the U.S. consumer is doing well with record-high credit card debt, auto loan delinquencies, erosion of savings, resumption of student loan payments and increased housing costs?

Credit card debt is offset by the rise in value of consumers’ assets, such as homes and stocks. U.S. consumer balance sheets are historically strong. Auto loan delinquencies are nowhere near as high as they were in the Global Financial Crisis. The drawdown of pandemic-era savings is being balanced by good growth in wages driven by a strong job market.

What is your year-end outlook for retail, industrial and multifamily cap rates?
CBRE Econometric Advisors forecasts year-end cap rates of 6.2% for retail, 4.9% for industrial and 5.2% for multifamily.

When will capital markets activity pick up again?
We expect that activity will begin to pick up in the second half of the year, based on our expectations for a gradual decline in long-term interest rates. Continued volatility in the bond market could be a headwind.

What are the best markets for growth opportunities?
Continued population growth will drive commercial real estate opportunities in the Sun Belt. Some of the larger gateway markets also will present compelling opportunities.

When do you expect the lowest prices for cash buyers based on cap rates and inflation?
We generally think property values will bottom out by midyear.

How can we reconcile your view that "cap rates rising through midyear will imply a decline in values for most property types" with "we expect that the lowest pricing for assets will be during the first half of the year"?
We think prices will have largely bottomed out by midyear, hence our guidance that the best pricing for buyers will be in the first half of the year.

Over what base number do you expect cap rates to increase by 150 basis points?
This varies greatly by sector but in broad terms it is the expected rise over the cap rate trough in H1 2022.

What are current borrowing rates by commercial real estate sector?
The average interest rate is 6% for multifamily and 7.5% for other property types. However, this will vary greatly depending on property type.

What is the typical interest rate spread above borrowing costs an investor would accept?
Spreads are currently around 175 bps.

How will WeWork’s bankruptcy impact office vacancy rates in urban centers?
WeWork's bankruptcy will have a limited impact on office vacancy rates. WeWork’s closure of more than 80 locations totaling approximately 5.3 million sq. ft. over the past year represents just 0.1% of total U.S. office inventory. Approximately 4.3 million sq. ft. of the closed locations were in downtown/urban submarkets, accounting for only 0.3% of total U.S. downtown inventory. WeWork currently accounts for 0.3% of U.S. office inventory. However, certain markets or submarkets with a higher share of WeWork locations may be impacted more than others. Some WeWork closures will be opportunities for other flexible office providers to acquire, thus limiting the impact on vacancy rates.

Are major downtown office markets dead?
The overall downtown office vacancy rate has exceeded the suburban rate for the first time in nearly 30 years beginning in Q3 2022. However, certain downtown live-work-play submarkets and micro-districts continue to outperform, such as Boston’s Seaport, Atlanta’s Midtown and Chicago’s Fulton Market. Demand is stronger and vacancies are lower in these areas than in more office-centric submarkets. While downtowns have faced continued headwinds since the pandemic, suburban markets cannot replicate their economic and cultural offerings, which will continue drawing people and businesses to urban centers. However, due to hybrid work and shifting demographics, cities must begin to reposition their more traditional office-centric districts or face the risk of obsolescence.

How do you see increasing costs for landlords to lease office space?
Rising availability has created a more competitive market for landlords. The tools landlords use to compete for tenants, including tenant improvement allowances and free-rent periods, have lowered effective rents, especially for lower-tier buildings. Average free rent for top-tier assets in major markets increased to 10.1 months in 2023 from 6.8 in 2019, while the average for lower-tier assets increased to 8.4 months from 6.4. Over the same period, TI allowances for top-tier assets increased 37%, compared with a 52% increase for lower-tier assets.

More landlords are offering flexible space options, such as pre-built spec suites, that increase upfront costs.

Tenant-favorable market conditions will persist in 2024. Asking rents are expected to fall 3.4% from their Q3 2023 average in 2024. Concessions like free rent and tenant improvement allowances are expected to moderate this year as asking rents decrease.

What are the biggest trends in the office sector?

1. Demand for space in prime, amenity-rich buildings in easy-to-access and vibrant locations will remain strong.
2. Strong demand for top-quality space, combined with a moderation in new supply, will create a competitive environment and tighter availability for prime space.
3. Stable office utilization rates will aid the sector’s recovery.
4. Live-work-shop submarkets will see the most demand.
5. More office conversions are expected.

For more insights, please see CBRE's U.S. Real Estate Market Outlook 2024.

What is the office utilization rate expected to be in 2024? What markets will have the highest utilization rates?
Office utilization rates are stabilizing. Nearly 40% of respondents to CBRE's 2023 U.S. Office Occupier Sentiment Survey think office utilization will increase marginally in 2024, while 60% said they have already reached a steady state of office attendance.

Throughout the pandemic, highly dense markets that relied on public transportation like New York, Chicago and San Francisco had lower office utilization rates than markets like Austin, Dallas and Houston. However, several lower-utilization markets have also posted the most improvement over the past year, including New York and Chicago, while markets where utilization was higher have largely stabilized.

Aside from location, there is more variability in utilization by tenant industry and occupier size. According to CBRE's Occupier Sentiment Survey, 71% of financial/professional services sector respondents reported that their company requires a return to the office, mostly for more than half the week. Only 56% of technology company respondents say their company requires a return, mostly for less than half the week. Smaller companies are more likely to report higher attendance.

Which markets are doing the best and which are you most concerned about?
High-growth Sun Belt markets remain outperformers in employment growth and demand, including Austin, Miami and Nashville. Furthermore, micro-districts with live-work-play characteristics are doing well. In Chicago, a micro-district in Fulton Market has a vacancy rate of 10%, compared with 24% in the Central Loop. In Austin, a downtown micro-district has a 9% vacancy rate, compared with 25% in the office-only downtown area.

Most gateway markets continue to post negative demand, with San Francisco, Boston and Washington, D.C. faring the worst. While Manhattan had negative demand in 2023, leasing activity in Q4 2023 was 20% above its five-year quarterly average and its tenants in the market activity returned to pre-pandemic levels.

Vacancy remains stubbornly high in San Francisco, where technology companies impacted by hybrid work continue to put sublease space on the market. The San Francisco office market closed Q4 2023 with an overall vacancy rate of 35.6% and negative net absorption of 1.25 million sq. ft. However, leasing by companies specializing in artificial intelligence is rising. The sector accounted for 28% of total leasing activity in 2023 vs. 5% in 2022.

How do you view the work-from-home trend in causing the office sector to underperform? Many commercial loans are maturing with the borrowers unable or unwilling to refinance them at an interest rate roughly double their existing rate and their office building assets only half leased.
We believe the long-term impact of hybrid work will result in an up to 15% reduction in space demand per worker. Occupiers will adjust their space needs and continued rightsizing will take place. Much of the rightsizing will impact lower-tier buildings, as occupiers reduce their footprints but upgrade their space to attract workers back to the office. We believe that vacancy will peak at 19.8% in 2024 before stabilizing and beginning to drop in late 2025 due to a moderation in new supply and continued job growth.

Sixty-six percent of U.S. office buildings were more than 90% leased as of Q2 2023—not far from the 71% of all office buildings in pre-pandemic Q1 2020. About 7% of offices are 50% leased or less. Only 10% of all U.S. office buildings account for 80% of the occupancy losses between Q1 2020 and Q4 2022. These tend to be older buildings in downtown submarkets with relatively high crime rates and few surrounding amenities.

Do you expect more office-to-multifamily conversions in 2024 and beyond?
Office-to-multifamily conversion activity is expected to increase, especially with more state and local government incentive programs. However, the number of office buildings that are suitable for conversion is extremely limited. While conversions in some micro-districts can help to revitalize those areas, conversion activity alone won't meaningfully impact overall U.S. office fundamentals.

About 24 office-to-multifamily conversions are scheduled for completion in 2024, above the annual average of 16 completed from 2016 to 2023. Another 70 are either underway or planned for completion in 2025 or beyond. Washington, D.C., Minneapolis-St. Paul and Dallas-Ft. Worth are the top markets for office-to-multifamily conversions in coming years.

See CBRE's latest brief on office conversion activity for more details.

What effect are the increasing costs of re-leasing space having on the retail market?
Rising construction costs have made tenant build-outs increasingly expensive. A record-low availability rate has given landlords the advantage in lease negotiations, especially in strong retail trade areas. Although retailers are still signing leases, many of them are for renewals of their existing locations, for which landlords don’t have to expend much capital on tenant improvements.

Do you expect that resuming student loan payments will impact student spending? If so, which retail categories will take a hit?
Retail will certainly be affected by the resumption of student loan payments, most likely in the discretionary categories and perhaps in restaurants. A drop in domestic travel by those paying student loans also could occur. However, the overall consumer remains resilient and has a healthy ratio of debt to disposable income.

Can retail properties be repurposed?
Many retail buildings have been repurposed, such as obsolete shopping malls into warehouse/distribution facilities. Other malls, even those that are high performers, are being converted into mixed-use properties that combine open-air retail with apartments, office space and hotel rooms. Here is a great article by ICSC on new uses for former malls.

Has the consumer profile changed for suburban open-air shopping centers? In other words, do Boomers and Gen-Zers visit similar shopping centers?
It all depends on the tenant base of the centers. Many retailers are closing underperforming stores in older malls and leasing space in open-air centers, often grocery anchored, to be closer to their customer base. Retailers choose their locations based on where their customer base lives and works. Additionally, other types of occupiers are choosing open-air suburban centers, such as fast-casual and quick-service restaurants, entertainment operators and medical providers.

Can nearshoring to Mexico have a negative impact for the U.S. industrial real estate market?
We believe that nearshoring to Mexico will benefit the U.S. industrial market, especially in border cities and along the NAFTA superhighway that runs from the Mexico/Texas border up I-35 and I-29 to the Canadian border in Minnesota. Mexico does not have an adequate number of distribution facilities, so its manufactured products will be shipped to U.S. distribution centers.

Which industrial occupiers are most active today?
While third-party logistics providers (3PLs) were the most active occupiers in 2023 for the fourth consecutive year, their market share fell to 30% from 35% year-over-year due to slower demand. Companies are not outsourcing to 3PLs as much as in the past two years due to economic uncertainty and less need to hold additional product inventory. There were similar declines in demand from traditional and e-commerce retailers. However, demand picked up from food & beverage users, the automobile industry (especially EV suppliers) and the construction industry.

What’s your take on the cold-storage market?
We continue to see solid demand for cold storage facilities, although the market is undersupplied. However, speculative development generally is not advisable because most cold storage companies have unique space requirements. Given the high cost of building cold storage facilities, along with tight lending conditions and economic uncertainty, new development has been limited. But we expect this will change as construction and borrowing costs start to fall later this year.

What is your outlook for industrial construction costs?
Overall, construction cost increases will slow to 3% to 4% later this year. However, industrial construction material costs have been falling for the past two years as space availability has increased, although construction labor costs have increased. We have observed anecdotally that material cost declines are often offset by higher labor costs. CBRE’s latest Construction Market Trends report provides more detail.

Will a softening economy exacerbate affordability issues and tight credit conditions, leading to less multifamily household formation?
Average multifamily rent remains relatively affordable at less than 30% of average renter income. Markets with the strongest supply pipelines, mostly in the Sun Belt, had the strongest rent growth in 2021 and early 2022 before receding. In regions with less supply pressure, particularly the Midwest and Northeast, affordability is much less of a concern.

There is some downside risk that household formation will slow along with the economy. We expect that positive household formation and demand will keep vacancy rates from rising substantially. There is a significant shortage of single-family homes in the US. Higher mortgage rates are keeping owners in their current homes for longer, which limits the for-sale market. The ramp-up in home prices and mortgage rates has also caused the relative cost of buying a home vs. renting to reach a record high, thus preserving multifamily occupancy rates.

What is the opportunity for multifamily in Florida? Will the market grow or stagnate?
Florida has one of the most favorable long-term economic forecasts in the U.S. Job and population growth—key drivers of multifamily demand—will support long-term growth of Florida’s multifamily markets. In the near-term, a wave of new supply is a temporary headwind.

What are the growth prospects for the short-term rental industry?
For a breakdown of short-term rental (STR) trends over the past six years and their impact on the U.S. hotel industry, please see our monthly State of the Union report.

In short, STRs have gained material market share over the past six years, accounting for 14.4% of industry demand and 24.7% of total revenue in November 2023 vs. 9.0% and 14.8% in November 2018.

Will hotel brand growth be through acquisitions of smaller hotels?
None of the global hotel brands in the U.S. are material owners of real estate. However, that many of the large brands—Marriott, Hilton, Hyatt, Wyndham, Choice—are launching new lower-priced brands that will be offered to franchisees. Franchisees can include independent owners, private equity, REITS and pension funds.

What is your hotel market forecast for 2024 and which regions and cities will outperform or underperform?
Some markets are performing better than before the pandemic. For example, New York is seeing stronger leisure and global demand, which along with Airbnb restrictions have driven record hotel room rates. San Diego’s healthy mix of group business, leisure travel and government demand has made it a post-COVID top performer. Other top performers include Los Angeles and Boston. Certain markets in the Pacific Northwest and Upper Midwest, where net migration outflows and crime have been problematic, could take several more years to recover.

Brief overviews of our market level forecasts can be found in our monthly State of the Union report.

More detailed forecasts for markets, price points and location types can be purchased here.

Will convention hotels recover?
Convention demand was running at 99.75% of pre-pandemic levels as of Q4 2023.

We expect that group demand will continue to improve in 2024, fueled by hybrid work; however, not all properties and markets will recover at the same pace. Markets with easy access to transportation and with many leisure amenities, such as Las Vegas and San Diego, will outperform. Market level forecasts can be purchased here.