On October 31, 2023, PwC and the Urban Land Institute (ULI) released their “Emerging Trends in Real Estate 2024 Report.” According to PwC leaders, the annual report looks forward to the year ahead, unlike most reports that look back at the last quarter or year. The report was compiled from surveys and interviews of over 2,000 real estate executives, investors, developers, and market experts. Respondents to this year’s Emerging Trends survey believe the worst of inflation is behind us, with over half expecting inflation to decline in 2024 and another third believing inflation will stabilize.
Given all the negative press about commercial real estate markets, one surprising result from our survey is that investors are eager to acquire new assets. The Emerging Trends Barometer for 2024 registered its highest “buy” rating since 2010, likely reflecting recent and expected price declines, making this a more favorable entry point for acquisitions after a decade of relentless appreciation. In addition, almost half of survey respondents expect cap rates to rise further next year, further depressing values.
Despite the economic headwinds and the challenges affecting credit, opportunities are available for high-quality properties that meet the needs of today’s investors and tenants. Firms must learn to adapt their growth strategies to succeed in this period of higher for longer interest rates,” said Andrew Alperstein, PWC real estate partner. We think it will take until 2024 for an uptick in transaction volume, but it will come. It will not necessarily hinge on a lowering of interest rates by the Federal Reserve. It could happen before then as people get used to the new higher rates and transact again.
Markets to Watch
Over the past 20 years, Emerging Trends has surveyed its members and asked them to evaluate the investment and development prospects of what has grown to be a list of eighty real estate markets across the United States. The survey results from the viewpoints of a diverse group of real estate professionals. The long-term impact on local markets has been hard to pin down since hot spots and infected areas have spiked and waned since the pandemic started in early 2020. However, looking at the markets moving up in the overall real estate prospects rankings, the suburban markets in the Sun Belt tracked in the survey have gained the most over the past two years.
Outlook Still Sunnier in the Sun Belt
To be sure, the market preferences of respondents to the Emerging Trends Survey have not changed radically in the past two years since undergoing fundamental shifts in the immediate aftermath of the pandemic. Clear general preferences are still evident. For example, respondents still see the best opportunities in the so-called “smile” markets situated along an arc in the southern third of the country. The number of these Sun Belt markets among the top twenty markets for “overall prospects” has increased to fifteen this year from fourteen in the last two years and an average of twelve in the decade preceding the pandemic. At the same time, the number of markets in cold-weather climates in the Northeast and Midwest has remained stuck at just two, down from an average of three before the pandemic. So, there is little recent change there.
It is not heat and humidity that investors and developers seek in the Sun Belt markets, of course, but strong market prospects. And forecasts for population and especially economic growth show that they are looking in the right places. Population and gross metro product (GMP) are both expected to grow faster in these markets than about anywhere else in the nation. Accordingly, these markets have maintained their dominance at the top of the Emerging Trends ratings, as can be viewed in the chart below.
- Dallas / Fort Worth
- San Diego
- San Antonio
Nashville, for the third year in a row, was the top-rated metro area, while Dallas/Fort Worth, and Atlanta both stayed in the top five for the second year in a row.
Property Type Outlook
After ten straight years of leading the pack, industrial/distribution has dropped to second place behind multifamily and single-family housing. “Niche” property types like life sciences and medical office continue to remain strong after surging in 2023.
The life sciences sector is still in its infancy, and the long-term growth potential is enormous. New drug discoveries and technological advances, along with an aging population and a focus on wellness, will continue to drive more funding and talent to biotech and pharmaceutical companies. While the economy and overarching market conditions may affect dynamics along the way, the future remains growth oriented.
The future still looks bright for medical office. The U.S. healthcare system supports an insured population of over three hundred million people and represents over seventeen percent of the U.S. gross domestic product.
A large part of the medical real estate that supports the industry is represented by medical office buildings (MOBs). Occupied by medical tenants, MOBs are facilities where services and procedures are performed on an outpatient basis. Many of these buildings are located in the community in convenient areas for patients to drive to. They might be occupied by practitioners of diverse specialties, ranging from urgent care to dialysis centers to ambulatory surgery centers and, of course, regular physician offices.
Looking ahead, many factors will continue to push demand for medical office space on an upward trajectory – the aging population and the growing number of insured people needing care, the increasing move by health systems and hospitals to locate services in more convenient, community-based areas, and advancements in health care technology and care delivery that require the space to support it. With reliable performance and little speculative construction, combined with the availability of industry-specific data, medical office has been maturing into an attractive and stable commercial real estate class. This has captured the interest of the broader investment community, and their appetite for exposure has continued to grow. These dynamics bode well for the future and help insulate the sector against broader market cycles.
Respondents to this year’s Emerging Trends survey believe the worst of inflation is behind us. That should give the Federal Reserve Bank permission to stop hiking interest rates. That should give the Federal Reserve Bank permission to stop hiking interest rates. After the Federal Reserve’s latest policy announcements, Whitney Watson of Goldman Sachs Asset Management thinks rates will stay at these levels for a while.
As the industry plans for the future, it is essential to look beyond past trends to examine how demographic influences have shifted since 2020 and whether these shifts are permanent or merely temporary. Whereas births, deaths, and immigration all affect population growth at the national and local level, it is domestic migration – the shifting of populations within the United States – that drives much of the local growth. This has been the story of the past several years – what John Burns Research and Consulting dubbed “The Great American Move” – as people raced to leave a home they did not care for or seek a new location altogether. This shift of geography had the most significant benefit to suburban areas. While the suburbs were already poised to capture an outsized share of the growth due to predictable demographic trends, the pandemic accelerated that growth. Suburbs accounted for 87% of net gain from 2015 to 2022. The rural U.S. locations also benefited, especially the suburban locations on the fringes of the large metropolitan areas.