DLA Piper's Global Real Estate State of the Market Survey 2024: Respondents report measured optimism

Commercial real estate (CRE) industry leaders report measured optimism for 2024 due in part to stabilized interest rates and a perceived sense of increased investment opportunities. The uptick in bullish outlook follows two years of dramatic pendulum swings in sentiment, according to DLA Piper’s 2024 annual Real Estate State of the Market Survey.

The survey analyzes the views of CRE leaders on the sector’s economic outlook, the attractiveness of various asset classes and investment markets, and overall expectations for the next 12 months. It was conducted in February and March 2024.

The DLA Piper survey found that 37 percent of CRE leaders are bullish, and 63 percent are bearish about the sector over the next 12 months. While bearishness is still the prevailing outlook, the 2024 survey reflects a notable increase in positive sentiment compared to 2023, when 86 percent of CRE leaders were bearish. In contrast, 2023’s negative outlook represented a dramatic reversal of course compared to 2022, when 75 percent of CRE leaders were bullish about the sector.

“After the stark highs and lows of the last two years, our 2024 survey provides evidence that many CRE leaders believe the market may be moving – or is at least poised to move – in a positive direction,” said John Sullivan, US chair of DLA Piper's Real Estate Practice and global co-chair of the firm’s Real Estate Sector. “The stabilization of, and anticipated decrease in, interest rates were significant factors in the increased sense of optimism, and how the interest rate picture plays out over the balance of this year will no doubt have a material influence on the sector’s performance.”

Interest Rates Dominate Investor Sentiment
Interest rates are the largest driver of both optimism and skepticism for CRE leaders in 2024, according to the survey. Among bullish respondents, the stabilization (28 percent) and lowering of interest rates (20 percent) were the top two reasons that respondents expressed optimism about the CRE market over the next 12 months. For those more bearish, interest rates were also the most common reason (31 percent) for concern. But that number is markedly down from 2023, when 46 percent of bearish respondents attributed their pessimism to interest rates.

“Given the importance that survey respondents placed on interest rates, it should be noted that inflation and labor market reports issued after the survey was fielded revealed stickier than anticipated inflation and solid job growth,” said Sullivan. “Moreover, on May 1, the Federal Reserve elected to hold interest rates steady, citing a ‘lack of further progress’ in reducing inflation in recent months. With the latest inflation and jobs reports coming in hotter than expected, it was not surprising that no rate cut was announced.”

Debt Looms, But Buyers See Opportunity in Availability of Distressed Assets
With an estimated $1 trillion in commercial real estate debt coming due before the end of 2025, an overwhelming 96 percent of respondents indicated that challenges with refinancing will have an impact on the industry in the next 12 months. However, respondents generally believe transaction volume will increase in 2024, and the potential for an improved economy, coupled with investment opportunities surrounding distressed assets, were among the top five reasons cited for optimism in the year ahead.

“The so called ‘wall of maturities’ presents a double-edged sword,” said Sullivan. “For many owners and borrowers, it will be difficult to refinance assets at a level sufficient to repay the current loan, but this also should lead to asset repricing and buying opportunities.”

AI Creates New Opportunities
Respondents believe there are opportunities across several asset classes and report that data centers are the most attractive asset class (53 percent, up from 32 percent in 2023). This is followed by multifamily (43 percent); logistics, warehousing, and cold storage (38 percent); and affordable/workforce housing (30 percent), all of which outranked data centers in 2023. Additionally, compared to 2023, logistics, warehousing, and cold storage experienced the greatest decline in attractiveness, down 15 points from last year, likely driven by oversupply from significant recent development.

“AI is beginning to permeate many aspects of how we work and live, and optimism for data centers as an asset class shows that these emerging technologies are driving a corresponding investment in CRE,” said Sullivan. “As AI technologies scale, the demand for processing and computing capacity has exploded, creating a growing need for data centers. Notably, we’re seeing data center development expand beyond traditional markets like Northern Virgina into both rural areas and central cities, with access to power as the single most important factor in location choices.”

Gateway Cities Bounce Back
As the pandemic accelerated migration patterns to the South and West, CRE leaders saw significant opportunities in growth markets outside of traditional gateway cities. This trend continues, with non-gateway cities cited in the current survey as presenting the most attractive investment opportunities. Miami (38 percent), Nashville (31 percent), Austin (29 percent), and Dallas-Fort Worth (29 percent) were still cited as the most attractive markets for investment, but the sentiment around all these markets was either flat or down compared to 2023.

However, respondents showed increasing optimism for gateway cities, with New York (named by 17 percent of respondents, compared to 12 percent last year), Chicago (22 percent, compared to 10 percent in 2023), Los Angeles (up 9 points to 13 percent), and San Francisco (an 8-point increase from 2023, cited by 10 percent of investors) all making significant gains in optimism.

“As major cities emerge from challenges posed by the pandemic and demographic shifts, some investors are beginning to see opportunities in undervalued assets in those markets,” said Sullivan. “Price corrections in stressed urban cores like San Francisco may be reaching a tipping point, and some CRE leaders believe that prices have corrected to a level where there are now attractive investment opportunities in traditional gateway cities.”

The release of the 2024 State of the Market Survey will coincide with DLA Piper’s 18th Global Real Estate Summit, to be held May 7 in Chicago. The event includes a line-up of top real estate dealmakers, investors, and innovators.