Six Reasons to be Optimistic About Commercial Real Estate in 2024

Six Reasons to be Optimistic About Commercial Real Estate in 2024

The commercial real estate industry is gearing up for action. Fears of a recession are mostly behind us, inflation is slowing down and the Fed is projecting interest rate cuts in 2024. Those aren’t the only reasons for CRE leaders to be optimistic this year. Here are six positive trends to keep an eye on in 2024.

1. The Stock Market is Booming

In 2024 alone, the S&P 500 has risen by nearly 9% — and by nearly 30% in the last 12 months. Tech companies with significant investments and R&D in artificial intelligence are bolstering the market. Nearly 30% of the S&P 500’s total market capitalization comes from the so-called Magnificent 7 stocks: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.  

More than 70% of organizations now use managed AI services, according to Wiz Research. “When we had the internet bubble the first time around … that was hype,” JPMorgan Chase CEO Jamie Dimon told CNBC in February. “[AI] is not hype. It’s real.”  

Beyond the Magnificent 7, approximately 70% of stocks are trading above their 200-day moving average on the New York Stock Exchange, Zacks Investment Research reported in early February. A breadth of industries are supporting the market’s growth.

2. Inflation is Down

Since peaking at approximately 9% in June 2022, the 12-month inflation rate has hovered between 3% and 4% since June 2023. Inflation reached the Fed’s annual 2% target over the second half of 2023, according to its preferred price gauge, Associated Press reporter Christopher Rugaber notes. And in January, prices rose just 2.4% higher from a year earlier, the smallest increase in nearly three years, Rugaber explained for the AP.

3. Real GDP was Strong in Q4 2023

In January, Fannie Mae upgraded its 2024 economic outlook to project a 1.1% year-over-year increase in the inflation-adjusted measure of real GDP, from the previously forecast 0.3%. In a press release, Fannie Mae’s Senior Vice President and Chief Economist Doug Duncan noted, “Inflation’s decline and the resultant Fed pivot to signaling future rate cuts rates lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway.” 

4. The Residential Construction Market is Solid

The ever-present need for housing kept the residential market strong. For homebuilders, 2023 was a hallmark year, HousingWire explains: “[W]ith the ability to buy down consumers’ mortgage rates while still maintaining double-digit margins, new construction grew to comprise roughly 30% of total housing inventory in 2023, more than double a normal year.”  

Though multifamily starts will likely decline as more units from the previous years’ boom near completion, apartment rents are still rising. “Rental costs are up 6.5% from a year earlier, nearly twice the pre-pandemic pace,” The Associated Press reports

5. Interest Rates are Expected to Decrease this Year into Next

The Fed said in March that it expects to cut interest rates three times in 2024, spurring optimism on Wall Street, The Associated Press reports. Major mortgage lenders are predicting a drop in borrowing rates by the end of 2024, heading into 2025. Fannie Mae expects 30-year mortgage rates to average 6.2% in 2024 and 5.7% in 2025. The Mortgage Bankers Association forecasts a 6.1% average mortgage rate by the end of 2024 and 5.5% at the end of 2025, according to Forbes. 

A drop in interest rates is expected to increase existing home sales and encourage more people to refinance their homes. The benefits of lower interest rates will extend outside the housing market, too, making it easier for individuals and companies to borrow money and take more risks, NPR notes.

6. Financial Executives are Confident About the Economy

In Bank of America’s annual survey of Merrill financial advisers, only 4% of the respondents expect a recession in 2024, compared with 85% of respondents who said so last year, according to Bank of America strategist Savita Subramanian in a CNBC article. 

The Business Roundtable’s quarterly gauge of CEO sentiment came in above its historical average for the first time in two years, Axios reports. That same article points to comments by Federal Reserve Bank of Atlanta President and CEO Raphael Bostic recounting: “I asked one gathering of business leaders if they were ready to pounce at the first hint of an interest rate cut. The response was an overwhelming ‘yes.’” 

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