Orange County, California skyline

Economically in the U.S., the fourth quarter was somewhat uneventful but generally positive. M&A activity saw a bit of a spike, while inflation news was favorable, which encouraged the Fed to stand pat on rates. Employment remained strong and consumer spending was resilient.

Commercial real estate news was generally less positive. Transaction activity remained extremely depressed, while most sectors saw some fundamental deterioration and valuations decreased broadly. Industrial and multifamily vacancies were rising while margins were being compressed on both the revenue and expense sides.

The news was a little better for owners of retail assets, which continued to benefit from strong demand for space. Capital markets continue to be the primary culprit behind stagnant markets with elevated borrowing costs discouraging development and acquisition activity. Unless motivated by events or distress, sellers have little incentive to sell, and buyers perceive assets as overpriced in the current environment.

Key takeaways:

  • Multifamily housing: Headwinds on the operational front persist for owners of multifamily properties but it remains a favored class for investment. While there are significant challenges to address affordability, the overall undersupply of apartment units and single-family homes underwrites a high level of confidence in the asset class’s ability to perform well for the long haul.
  • Office: The office sector has fallen into an unfortunate slump as vacancies continue to rise amidst a steady rate of new deliveries, and in our high interest rate environment, transaction activity continues to suffer.
  • Retail: Transaction activity was up over the prior quarter, led by some experiential deals and strip centers, which continue to lead the asset class. In addition, holiday sales were generally favorable – a positive for retail tenants. In 2024, despite challenges existing in specific pockets and sectors, and broadly static transaction markets, solid fundamentals are poised to drive operational success for retail owners.
  • Industrial: Many signs point to an industrial market that is correcting for the meteoric pace set during the pandemic as investors and owners take a more cautious approach to underwriting industrial transactions, even while average industrial rent growth still exceeds that of most other real estate sectors.
  • Capital markets: REIT equities managed to end the year broadly up, consistent with a strong fourth quarter in the overall stock markets. Office was the surprising leader in returns for the last month of the year, surging almost 20% to end the year with a slightly positive return. There was some easing in borrowing rates at the end of the quarter, likely prompted by confidence in future Fed rate reductions.

For further analysis of the fourth quarter, download our latest report.

For more information on this topic, or to learn how Baker Tilly specialists can help with your real estate needs, contact our team.

Brent W. Maier
Kevin R. Secrist
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