What the Soft Landing Could Look Like for CRE Next Year

A soft landing has been “baked in” for next year (but it is not guaranteed) and the pace of growth for commercial real estate will be slower in 2024 than it was in 2023, according to a new industry forecast video by Marcus & Millichap reviewing its macro perspective based on US averages.

“Individual assets, and even whole cities can and will outperform the broader national average,” John Chang, its Senior Vice President, National Director of Research and Advisory Services, said.

“A soft landing would be a period of flat or nominal growth,” he said. “In other words, GDP growth at or near 0% for part of the year.”

Marcus & Millichap expects job creation to continue to shed momentum, slowing from about 2.7 million jobs in 2023 to about 1.7 million new positions in 2024. As part of that, the number of job openings should continue to shrink and wage pressure should continue to ease.

“We also anticipate core retail sales will flatten on an inflation-adjusted basis along with business investment in equipment,” Chang said.

“Meanwhile, consumer sentiment should gradually increase, which would lift household formation numbers and in turn bolster apartment performance.”

Because single-family home prices are so high, weaker home sales activity will also support the rental housing market, and that combination should lift apartment demand to about 390,000 units in 2024.

Marcus & Millichap is forecasting the completion of a record 480,000 new apartments in 2024, and that supply surge will drive vacancy rates up by 30 basis points to 6%.

The significant wave of new apartments entering lease-up will drive the use of concessions and restrain effective rent growth to an average of about 1.5% on a national basis,” he said.

Office Vacancies to Rise 90 bps

Marcus & Millichap is forecasting office vacancies will rise, on average, by another 90 basis points in 2024 to a record high of 18.5%.

That number also assumes negative absorption of about 26 million square feet, which is not as bad as the negative 67 million square feet logged in 2023, Chang said. The generally weak space demand, however, will likely restrain asking rents, driving a decline of 1.9%.

Not all office properties are faring poorly, Chang said, citing areas such as Southeast Florida, Las Vegas, and the Inland Empire as ones that continue to outperform the broader trend.

Retail Absorption to Remain Positive

Retail was hit hard by the pandemic but has largely since recovered. Part of that’s because the pandemic finally cleared off a lot of the dead weight, old, outdated, enclosed malls and leftover K-Marts, Chang said.

The other factor driving retail strong results is the record retail sales achieved over the past 18 months or so with grocery and necessity retail centers delivering particularly strong results.

“Although we expect consumption and inflation-adjusted core retail sales to flatten in 2024, space absorption should remain positive at about 26 million square feet,” Chang said.

“But that still falls short of the expected 37 million square feet of newly developed retail space, and that will drive a 10-basis point rise in vacancy rates to an average of 4.8% and taper rent growth to about 2.6%.”

Industrial Construction to ‘Taper’

This sector has generally delivered very strong performance over the last few years, according to Marcus & Millichap.

“We expect construction to taper receding from the record, 400 million square feet delivered in 2023 to about 360 million square feet,” he said.

“And although we expect space demand to increase in 2024, we still expect an 80-basis point increase in vacancy rates to 6.1%.

“That said, it should be noted that industrial construction will remain concentrated in about 10 major metros. So, the performance of industrial assets could vary significantly on a market-by-market basis.”