As the commercial real estate industry reaches the halfway point in the year, it continues to face the effects of the high-interest-rate, high-inflation economic environment.

“Persisting uncertainty about the direction of the economy is having an impact for real estate developers,” said Dan Mullinger, head of PNC Real Estate. “Ongoing higher rates have led to lower transaction volume so far this year, and the inflationary impact of the last two years is also causing expense growth to trend upward.”

But the outlook isn’t entirely pessimistic, as there are some areas that seem to be on an upward trajectory: 

  • Multifamily Real Estate – A record amount of supply of multifamily real estate is projected to become available during the remainder of the year. There is a high level of absorption, which indicates a high level of demand for multifamily properties. But even despite the record absorption level, the supply is in excess of the demand, with increased rates of vacancies and concessions. 
  • Commercial Mortgage-Backed Securities (CMBS) - One fairly surprising trend that has emerged in 2024 is a substantial increase in CMBS activity. CMBS origination slowed down initially early in the year in anticipation of rate cuts by the Fed, but activity has ticked back up as these cuts have, thus far, failed to materialize. Developers are looking to take action in the midst of uncertainty regarding rates, and CMBS loans can be an attractive option in a high-rate environment. CMBS origination is currently on a path to exceed 2023 levels. 
  • Office Space – Another somewhat surprising finding that emerged from PNC’s Inside the Minds of CFOs survey may point to a potential impending rebound for the office space market.  Among the 300 surveyed CFOs, 65% indicated they expect their companies’ office square footage will increase in the next twelve months, with 33% stating they did not expect any change and only 3% citing an expected decrease in office space.

Stable So Far: Retail and Industrial

Thus far, the performance of other sectors within commercial real estate has aligned with PNC Real Estate’s expectations in its annual outlook: 

  • Retail: Retail traffic remains steady, including for mall properties. Consumer spending has been relatively strong for most of the year, but a slowing in this area would have an impact on the retail sector, as well as the economy as a whole.
  • Industrial/Logistics: The industrial and warehouse space also seems to have remained fairly resilient thus far in 2024. Supply chains are holding up overall, and there is support from reshoring manufacturing and companies reconfiguring their supply chain logistics.
  • Affordable Housing: Elevated construction costs, interest rates, and operating expenses continue to impact the supply of affordable housing across the United States. Despite these challenges, household formation and population growth are continuing, so investment in this sector continues to be key.

Looking Ahead to the Rest of 2024

While there’s no doubt it’s a challenging time for commercial real estate, there is reason for some level of optimism. “It’s important to remember the economy and the nature of the real estate business are cyclical. Even though we’re at a difficult point in the economic cycle, we are seeing businesses start to act to move toward their business goals versus remaining ‘on pause.’ That gives us optimism for what’s ahead,” said Mullinger. 

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