A Look Back at 2023 Alongside Projections for 2024

As we close the chapter on 2023, it’s always important to look back at the last 12 months, do a year-in-review, and to look forward to next year. Without a doubt, 2023 was a roller coaster year for commercial real estate and was reminiscent of 2008 and the Great Financial Crisis drama that enveloped the space, even if not as bad.  

The CRE industry, known for its ups and downs, came into 2023 riding high on a 12-year wave of cheap money, compressed cap rates, and high transaction volumes. The age-old adage “what goes up, must come down” played out vividly as the Federal Reserve’s aggressive interest rate hikes that began in 2022 and continued into 2023 began to bite levered investments alongside a complicated mix of operational challenges and global events. It was most certainly a challenging investment environment. 

Flipping back to January 2023, it’s intriguing to see how the year kicked off with a wave of optimism thanks to the 10-year U.S. Treasury index dipping to 3.3%, down from its 4.25% peak in October 2022. However, this was short-lived as the index climbed back up, reaching 5.00% by October, leading to some of the highest borrowing costs in nearly 15 years. 

External to CRE but important to the sector’s trajectory, the U.S. banking sector took a hit in March when large and well-healed banks failed, drying up critical lending sources and inserting much uncertainty into the CRE world as lending became harder for owners/operators to get for refinanced loans for existing assets or new loans for commercial acquisitions. This led to a sharp drop in transaction volumes, a dip in consumer confidence, and decreases in rental rates in most of the country’s major housing markets.

As the year progressed, the Fed’s battle to decrease inflation brought unprecedented increases to the Fed Funds, which threw a wet blanket on all commercial assets but particularly impacted entities relying on floating-rate financing. The sudden rise in interest costs necessitated additional capital infusion for many owner/operators and the failure of some CRE companies.

Additionally, 2023 brought a series of political and geopolitical events including the ongoing Ukrainian conflict and the distressing events in Israel on Oct. 7 that escalated tensions and influenced material and energy prices worldwide.

Looking forward, there is hope amongst investment professionals that the 10-Year Treasury will continue the decline that started this month into 2024. If that does in fact occur, 2024 could be the year in which CRE assets stabilized and begin making up some of the valuation decreases inherent to 2023. 

Following the aforementioned banking sector stress in 2023, there is hope that new regulations expected in 2024 could lead to more stability in the banking sector even if tighter lending standards. While the multifamily sector appears to be in a strong position in 2024 as it relates to maturity defaults, the office sector is in a very different position and the losses banks could take on those loans could impact real estate lending globally. Time will tell. 

Lastly, the oft-quoted and much hoped for “Soft Landing” the Fed and other economists signaled throughout 2023 appears more likely than ever to be achieved in 2024. If this in fact occurs and a large recession is in fact avoided while inflation continues to come down, it could lead to stronger consumer confidence going forward. While hard to predict the downstream impact of that, a rise in rental rates at multifamily assets as well increased occupancy could be on the horizon. 

Despite the hurdles of 2023, we’re stepping into 2024 with renewed hope and optimism. The commercial real estate sector is known for its resilience, and the underlying strengths of the U.S. market continue to support its long-term viability. Here’s to embracing change and thriving anew!