More trouble may await the commercial real estate market as it is expected to suffer a $480 billion decline in 2024, according to a new report.
Property values in the commercial real estate market are expected to fall by 10% next year, which roughly equates to $480 billion. That loss will come after the commercial real estate market has already lost 11% or $590 billion this year, Capital Economics' deputy chief property economist, Kiran Raichura, wrote in a recently released report.
"Persistent weak growth and elevated (albeit soon-to-be falling) interest rates continue to spell trouble for real estate values," the report read. "At the same time, the adjustment in cap rates will continue to come through in appraisals, meaning that all-property capital values fall by 10% in 2024, after dropping 11% in 2023."
Losses by Sector
The report also broke down the losses it projects for each sector in the commercial real estate market. The office sector, for instance, is expected to lose 15% in property values from 2024 to 2025. This was brought about by changes in how people work after the COVID-19 pandemic lockdowns.
Aside from a decline in property values, demand for office space is also expected to weaken over the next few years. Office vacancies are expected to peak at 20.5% at the end of 2025, up from $16.7% in the third quarter of this year.
"We think the overall peak-to-trough decline will reach 43%, compared with around 30% seen by the end of 2023," Raichura wrote about office values.
In the apartment sector, Capital Economics expects property values to fall and provide a negative total return on investment next year before it recovers in 2025. Overall, the research firm expects capital values to fall 8.8% this year and another 10.3% in 2024.
In the industrial sector, property values are expected to decline 20% from peak to trough before improving in 2025.
The retail sector is the only bright spot in the commercial real estate sector. The research firm expects close to 6% in annual total returns. According to a forecast by CBRE, some of the retail markets to watch include Orlando, Charlotte, Denver, San Francisco, and Orange County.
