Persistent inflation continues to influence the Federal Reserve’s decision making in 2024, amidst ongoing moderation in overall economic and labor conditions. These factors create a complex and mixed outlook for commercial real estate assets according to Cushman & Wakefield’s mid-year Macro Outlook report.

“Cracks are forming beneath the surface, as consumers and businesses remain under pressure from the cumulative effects of higher interest rates and inflation,” said Rebecca Rockey, Deputy Chief Economist and Global Head of Forecasting at Cushman & Wakefield. “Some sectors have been, or are in, contraction mode. The manufacturing and transportation sectors have been anemic, if not recessionary. Job growth is concentrated in lagging sectors like government, education and healthcare.”

Office

The rationalization of office space usage is continuing in 2024, and consistent with Cushman & Wakefield’s prior outlook, with net absorption projected to be negative this year at -63 million square feet (msf) and -7 msf next year. Demand is expected to average 20-25 msf per year as we go into the second half of the decade.

“Although office jobs will continue to grow, office demand is still adjusting to hybrid work. We believe we are further along in that process beyond what weighted average lease terms imply, as about half the space on the sublease market has an underlying expiration date in 2028 or beyond. Occupiers have pulled forward future downsizing,” said David Smith, Head of Americas Insights.

Trifurcation remains a key theme, however, there are bright spots in the office sector, including 30% of Class A buildings that have essentially no vacancy and another 20% that have sub-15% vacancy. The bottom 10% of office assets account for over 730 basis points (bps) of current vacancy, reflecting a growing weight that these highly challenged and likely obsolete buildings have on headline statistics.

Capital Markets

Investors will remain income-focused for the foreseeable future as existing debt slowly re-prices into the higher-rate environment. Fortunately for most asset classes, the NOI outlook is decent if not robust, growing by 1.5% to 2% this year and next (in a diversified portfolio) before accelerating to the 4.5% to 7.5% range in the following years.

“Despite the fact that some measured cap rates will march upwards as credit spreads normalize off higher base rates, we forecast that total unlevered returns will again reach double-digits and high-single-digits in 2026 and beyond,” said Abby Corbett, Senior Economist, Head of Investor Insights. “Buyers and sellers are growing increasingly more open to act, though both sides remain cautious and selective in the near term. Debt maturities and other liquidity-based needs should continue to motivate sellers to meet the market, thereby improving price discovery for the marketplace more broadly.”

The long-awaited distress wave will continue to disappoint opportunistic capital sitting anxiously on the sidelines, as the process unfolds at a slow, sequential, and often boring pace. In 2023, only 1.8% of total sales were distressed sales and many delinquency rates remain low or are holding steady. This is obviously not true for the office sector where expected distress is greatest—as well as for regional malls and hotels.

Industrial

While e-commerce continues to increase as a percent of retail sales, some of the pull-forward effect—firms building out sooner and faster during the pandemic—will weigh on the demand outlook for 2024 and the first half of 2025.

New supply will be a key factor driving vacancy in 2024 for most markets, as another 381 msf delivers throughout the market this year. The pipeline is dropping off significantly and is projected that only 160 msf will be delivered in 2025. From there, lower interest rates and improving fundamentals will help drive a new construction cycle. Absorption is expected to hit a trough of just over 100 msf in 2024 before roughly doubling in 2025. It is projected to return to a more typical demand run rate in 2026.

“The imbalance in supply and demand seems starker than it is—vacancy is expected to peak in early 2025 at 6.7% before starting to compress back toward 5% by the end of our five-year forecast horizon. For context, this is consistent with the lowest vacancies recorded in prior cycles, meaning this cycle is fundamentally different,” said Jason Price, Senior Director, Americas Head of Logistics & Industrial Research.

Rent growth is moderating on par with expectations after having grown by 54% since Q4 2019. Cushman & Wakefield projects rent growth will come in at 3% in 2024 and 2% in 2025 before picking back up to the mid-single digits.

Retail

Demand for retail space remains robust, in part because of a strong pipeline of store openings by large retailers. Year-to-date there have been roughly 850 more store openings planned than closures.

“The tenant mix continues to diversify, limiting the downside risk of sector-specific weakness. Beyond traditional retailers, consumer service providers—including restaurants, education/healthcare, beauty and wellness—are leasing more space in retail centers. Consumers will continue to rotate back to service-oriented spending that has lagged post-pandemic, benefiting retail centers featuring these offerings,” said James Bohnaker, Senior Economist.

The lack of new supply is a key aspect of the outlook. With less than 12 msf feet of retail space under construction, and over 4.3 billion square feet of inventory, high-quality retail locations will remain scarce. New supply is not expected to ramp up to its 2010-2019 average until 2027, at the earliest.

Owners of well-located shopping centers will continue to have leverage to raise rents given the demand and supply dynamics, although rent growth is poised to slow over the next several years. After peaking at 5.0% in 2022, rent growth will average 2.9% from 2024-2026.