PNC 2024 Outlook: Commercial Real Estate

The commercial real estate market endured its fair share of challenges in 2023, as businesses faced a rising interest rate environment, and elevated inflation impacted property expenses. Looking ahead to 2024, these pressures are likely to persist. But, according to Mike Thomas, head of PNC Real Estate, there are strategies businesses can employ to help contend with the ongoing economic uncertainty.

“A lot of developers are in a wait-and-see mode right now in terms of making decisions about borrowing or refinancing. It’s hard to predict what the Fed is going to do with interest rates in the coming months, but businesses that are able to take some practical steps to adapt may not only fare better in the current setting, but also be in a better position to rebalance their portfolios when rates eventually do start to come down.”

Such approaches might include working with their bank to structure flexible term extensions that provide financing stability through a volatile period. Borrowers may also consider rate hedging products that create more short-term interest rate certainty or treasury management solutions that increase efficiency in a rising cost environment. When looking for financing, particularly as it relates to multifamily real estate, Agency Finance may be an appealing solution, as it allows for longer loan terms than conventional finance options and fixes the interest rate, eliminating concerns about increasing borrowing costs.

Stability Despite Uncertainty for Some Sectors

While no sector of the commercial real estate industry is immune to economic pressures, some may be better positioned than others to endure a high interest rate environment in 2024.

Industrial and Warehouse – Because development cycles are shorter for industrial and warehouse properties, this sector has managed supply reasonably well over the past few years. As a result, supply and demand are in relative equilibrium, and lease rates have kept up with cost and rate increases.
Lodging – Lodging has performed well since recovering from pandemic lows, although historically it has been particularly sensitive to economic downturns due to daily rate repricing. In the current economic cycle, the leisure traveler has continued to use this asset class owing to strong consumer balance sheets and employment. Looking into 2024, the outlook is likely to be driven by the severity of any potential economic downturn versus the continued high-rate environment.
Student Housing – While student housing is impacted by interest rates, the balance of supply and demand has led to steady performance. As demand is not projected to decline in 2024, this asset class is likely to remain stable.
Retail – Retail has performed reasonably well over the last few months, with entertainment venues, restaurants, and similar businesses seeing steady revenues. Similar to lodging, the strength of the consumer has buoyed performance in this sector. However, retail is another example of an asset class that could be negatively affected in the event of an economic downturn, as this would impact consumer spending.

Challenges – and Opportunities – for Multifamily Real Estate

Because it has performed so well over the past several years and supply and demand dynamics provided sustained tailwinds for owners, multifamily real estate has attracted a great deal of capital, and supply has grown to meet the substantial housing need in the U.S. The sector has also commanded tighter debt service coverage levels and greater loan advance rates in recent years, making the sector more sensitive to the current high interest rate environment. Increased borrowing costs, lower valuations and resulting diminished loan availability has reduced housing permits and starts across the country and should mitigate current supply concerns toward the end of 2024.

The impact this is likely to have on supply and demand dynamics may lead to significant opportunity for developers in 2025 and beyond, when interest rates may have come down and the economy has potentially emerged from its current cycle. Even with new development forecasted to be down in 2024, household formation and population growth will continue, leading to an increased demand for housing – and a resumption of a housing supply imbalance.

Because the shortage of affordable housing continues to affect the country in such an impactful way, Thomas says that PNC will remain focused on providing affordable housing equity, even amid the challenging economic outlook. “We know that the lack of affordable housing is a major issue across the country, and that the problem is only going to grow throughout the next year,” he said. “PNC will continue to be active in investing in affordable housing equity in 2024, just as we have been for years, to try to address this need.”

PNC will remain focused on providing affordable housing equity, even amid the challenging economic outlook.
— Mike Thomas, head of PNC Real Estate

Ready to Help

PNC can work with you to develop strategies to help you manage issues related to market volatility and commercial real estate. For more information, reach out to your PNC Relationship Manager, or contact us.

Schedule an appointment

SCHEDULE NOW

Find a branch near you

FIND NOW

Important Legal Disclosures and Information

The article you read was prepared for general information purposes only and is not intended as legal, tax or accounting advice or as recommendations to engage in any specific transaction, including with respect to any securities of PNC, and do not purport to be comprehensive. Under no circumstances should any information contained in this article be used or considered as an offer or commitment, or a solicitation of an offer or commitment, to participate in any particular transaction or strategy. Any reliance upon any such information is solely and exclusively at your own risk. Please consult your own counsel, accountant, or other advisor regarding your specific situation. Neither PNC Bank nor any other subsidiary of The PNC Financial Services Group, Inc. will be responsible for any consequences of reliance upon any opinion or statement contained here, or any omission. The opinions expressed in this article are not necessarily the opinions of PNC Bank or any of its affiliates, directors, officers or employees.

These materials are furnished for the use of PNC and its clients and do not constitute the provision of investment, legal, or tax advice to any person. They are not prepared with respect to the specific investment objectives, financial situation, or particular needs of any person. Use of these materials is dependent upon the judgment and analysis applied by duly authorized investment personnel who consider a client’s individual account circumstances. Persons reading these materials should consult with their PNC account representative regarding the appropriateness of investing in any securities or adopting any investment strategies discussed or recommended herein and should understand that statements regarding future prospects may not be realized. The information contained herein was obtained from sources deemed reliable. Such information is not guaranteed as to its accuracy, timeliness, or completeness by PNC. The information contained and the opinions expressed herein are subject to change without notice. Past performance is no guarantee of future results. Neither the information presented nor any opinion expressed herein constitutes an offer to buy or sell, nor a recommendation to buy or sell, any security or financial instrument. Accounts managed by PNC and its affiliates may take positions from time to time in securities recommended and followed by PNC affiliates. Securities are not bank deposits, nor are they backed or guaranteed by PNC or any of its affiliates, and are not issued by, insured by, guaranteed by, or obligations of the FDIC or the Federal Reserve Board. Securities involve investment risks, including possible loss of principal.

Indices or Benchmarks. Indices are unmanaged, are not available for direct investment, and are not subject to management fees, transaction costs or other types of expenses that an account may incur. Indices performance results do not represent, and are not necessarily indicative of, the results that may be achieved in accounts investing in the corresponding investment strategy; actual account returns may vary significantly. For definitions of Indices/Benchmarks used herein, please refer to www.pnc.com/indexdefinitions.

The PNC Financial Services Group, Inc. provides investment consulting and wealth management, fiduciary services, FDIC-insured banking products and services, and lending of funds to individual clients through PNC Bank, National Association (“PNC Bank”), which is a Member FDIC, and provides specific fiduciary and agency services to individual clients through PNC Delaware Trust Company or PNC Ohio Trust Company. PNC provides various discretionary and nondiscretionary investment, trustee, custody, consulting, and related services to institutional clients through PNC Bank, and investment management services through PNC Capital Advisors, LLC, an SEC-registered investment adviser and wholly-owned subsidiary of PNC Bank. PNC does not provide legal, tax, or accounting advice unless, with respect to tax advice, PNC Bank has entered into a written tax services agreement. PNC Bank is not registered as a municipal advisor under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

“PNC” is a registered mark of The PNC Financial Services Group, Inc.

PNC General Disclosure https://www.pnc.com/en/corporate-and-institutional/pnc-general-disclosure.html