Commercial Real Estate Professionals Express Tempered Optimism
“I believe the commercial real estate market is poised to begin stabilizing, although interest rates and broader economic conditions will remain in flux for some time.”
—Respondent Comment
“After two years of market doldrums, the commercial real estate market is showing signs of revival. Inflation is down, the Federal Reserve has lowered rates, the economy is steady, and employment is at an all-time high. Oversupply in Texas and the Southern Sunbelt is beginning to dry up, promising a return of more robust fundamentals. At the same time, higher insurance and labor costs are exacting a toll of the bottom line for owners and operators.
To better assess how the industry will respond to this complex of factors over the next year, Commercial Observer commissioned a comprehensive market sentiment survey starting in August 2024, eliciting responses from 440 industry leaders (at the director level or higher) on issues related to the future of commercial real estate. Of the respondents, one-fifth were founders, owners, or principals of their firms while another 18% were C-suite executives [Char t A].
Which of the following best describes your seniority level/ job title?
The survey revealed that commercial real estate industry professionals are cautiously optimistic and foresee gradual shifts in the market over the next 12 months. When asked to offer their best guess on where the CRE will be in 12 months, the majority of respondents expressed positive views, but their statements were often tempered by qualifiers like “slow,” “slight,” “somewhat,” “marginal,” and “modest.”
Among the most important findings:
• Fears of a recession are off the table, and respondents are feeling more positive about the economy, interest rates, and the commercial real estate market than they have in the past two years—but their optimism is qualified.
• Respondents said that it would take a drop in the Fed Funds rate of at least 100 bps from its peak to reignite the CRE markets, but they were divided about whether this would happen.
• Managing CRE properties requires more expertise than ever. Respondents cited a complex mix of factors, from high labor and materials prices to government regulation, that they must address on a daily basis.
• Office is somewhat of a wildcard. Few respondents currently have a positive view of office, but they were evenly split about investor sentiment rising or falling over the next 12 months and about cap rates increasing or declining.
• Our respondents felt that multifamily is ripe for recovery, with 56% currently holding a positive view and 48% expecting an uptick in investor sentiment.
• Across virtually all asset classes, CRE professionals identified the Sunbelt Southeast, Texas, and the Northeast as the most attractive markets.
The Outlook: Gradually Improving
“ “
“I
expect a slow recovery with overall modest increases in asset value.”
—Respondent
Comment
Overall, respondents are feeling more positive about the economy and the commercial real estate market than they have in the past two years—but their optimism is qualified. For instance, only 8% foresaw a recession in the next 12 months, but the rest were evenly split between a soft landing (43%) and a steady recovery (41%). Virtually no one (1%) expected to see a strong recovery with robust growth [Chart B]. As one respondent said, “We are in the midst of a solid recovery, but it’s not overly hot.”
What is your prediction about the economy over the next 12 months?
Similar muted optimism can be seen in their views on interest rates. When the survey was launched in August 2024, three-quarters of the respondents forecast that the Federal Reserve would reduce the Fed Fund rate by up to 75 bps over the following year [Chart C]— which, as of December 2024, it had already done. There was a strong consensus (67%) that it would take a drop of 100 bps or even more to reignite the CRE market [Chart D], but only 16% maintained that the Fed would lower rates at least a full point from their August high.
Where do you think the federal funds rate to be at the end of 12 months?
How much would the Fed have to drop the federal funds rate to reignite the CRE market in the next 12 months?
The same cautious optimism can be seen in their outlook on the 10-year Treasury over the following year [Chart E]. Few saw yields exceeding 5.00%, reflecting their expectations of steady but not spectacular economic growth, but they were evenly split between those who saw it moving in the 4.00% to 4.99% range (43%) and others who predicted it ranging between 3.00% and 3.99% (51%). Almost no one (2%) saw a return to the pre-2022 era of sub 3.00% rates. As expected, respondents viewed economic performance as the prime determinant of the 10-year Treasury yield (32%), but they also worried about the size of the federal debt (24%) and the possibility of global disruption (17%) [Chart F].
Chart C
Chart D
Where do you think the 10-year treasury yield will be at the end of 12 months?
What do you think will become the most important factor influencing the 10-year Treasury yield over the next five years?
Although respondents noted that declining interest rates and reduced inflation (73%) would move more properties to the market [Chart G], there is uncertainty, as we have seen, that rates will drop sufficiently to do so. While others pointed to the growing wave of loan maturities (62%) as a force that would increase market volume, respondents saw defaults/foreclosures (54%) and loan extensions (52%) as the principal outcome [Chart H].
Name
two top issues that would move more properties to the markets in the next 12 months.
What are the top three most important impacts you foresee from the wall of loan maturities coming due in 2024 and 2025?
Given this response, it is not unexpected that CRE professionals in our survey were muted about cap rates movements [Chart I]. Half or more of the respondents said that cap rates would remain unchanged in hospitality (54%), industrial (50%), and retail (50%). Only in multifamily did they lean toward cap rates declining (40%). Given the gloom that surrounds office, this asset class was, surprisingly, a question mark: 37% saw cap rates increasing, 31% said they would stay the same, and 32% forecast that they would actually drop.
How will cap rates move over the next 12 months?
Tighter Margins Drive Decisions
“ “
“Probably the biggest issue in the short term will be property expenses.”
—Respondent
Comment
While respondents were generally positive about the CRE market, a return to more robust market fundamentals so far has not been rapid enough to eliminate pressures on their bottom line. Owners and operators were considering investment in technology to offset rising expenses and exploring alternative structures for refinancing and acquisitions. But real estate is notoriously local—and investors in some regions, they said, will fare better than others.
The response to a question about the biggest day-to-day issues that owners and operators face [Chart J] highlights the complexity of managing commercial real estate. The most frequently named problems were finessing high labor and material prices (60%) and liquidity challenges (49%), but they were followed by a closely spaced cluster that included limits on raising rents (41%), regulation and zoning (38%), finding and retaining talent (37%), and new government policies and restrictions (36%). Seventy percent of the respondents named insurance premiums as the biggest driver of operating expenses over the next 12 months, twice those who selected property taxes (36%) and labor (36%) [Chart K].
What are the biggest day-to-day issues that owners and operators face?
What do you expect to be the top two factors most responsible for rising operating costs over the next 12 months?
Extreme weather is a major factor behind rising insurance costs [Chart L]. Forty-five percent said exposure to unusual heat, flooding, storms, or fires would have some effect on their investment decisions, and nearly a fifth (18%) said it would have a decisive effect.
In an attempt to lower costs, many commercial real estate professionals are adopting technology. The top three technologies that respondents believed commercial real estate owners would be most likely to adopt over the next 12 months were artificial intelligence (59%), property management systems (47%), and cybersecurity (42%) [Chart M]. While the real estate applications of AI are in their infancy, they pointed to its use in building information modeling (34%), deal sourcing and matching (20%), and property management (20%) as likely to have the most immediate impact [Chart N].
Select the top three technologies that commercial real estate owners will be most likely to invest in over the next 12 months.
In what areas do you anticipate AI to have the most impact?
Tight market conditions and high interest rates have also led commercial real estate professionals in our survey to take a slightly more inventive approach to financing. While they continue to see regional banks (28%) as the primary source of funds, they are also willing to consider debt funds (24%) and nonbank financial institutions (20%) [Chart O]. Similarly, while depending on debt capital (39%), a significant portion intended to tap preferred equity (31%) and common equity (28%) as part of their financing package [Chart P].
Chart M
Chart N
What will be your firm’s top two most important sources of financing during the next 12 months?
Will your firm be using any of the following types of financing during the next 12 months?
Challenges facing investors can vary significantly, however, from region to region. Indeed, the results of the survey conclusively bore out the assertion of one respondent that “the pace of recovery and growth will vary by region.” In each of the five asset classes we covered—hospitality, industrial, multifamily, office, and retail—the Southeast Sunbelt and Texas were ranked among the top three locations for investment. And in every asset class except industrial, the Northeast joined them [Chart Q]. In fact, it was the top location
for investing in office. Confirming this finding, the same trio—Texas (51%), the Nor theast (49%), and the Southeast Sunbelt (49%)—are expected to see the greatest upturn in investor sentiment over the next 12 months [Chart R]. This contrasted to California, which was saw the highest downturn in expected investor sentiment (42%) [Chart S].
What will be the top three locations for investing over the next 12 months?
What locations will see the greateast upturn in investor sentiment over the next 12 months?
What locations will see the greateast downturn in investor sentiment over the next 12
Chart Q
Asset Classes Head in Different Directions
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“The CRE industry is undergoing a major transformation. We will likely see a continued divergence between sectors.”
—Respondent Comment
The pandemic drove a wedge between the five classic real estate sectors, but they have had time to recover from the initial shock. As most commentators and survey respondents observed, industrial benefitted most and office was hardest hit, but the outlook for both of them—as well as hospitality, multifamily, and retail—are not as clearcut as they were in 2021.
Industrial remains the favorite of CRE professionals. Sixty-one percent had a positive view of industrial and 35% expected an upturn in investor sentiment over the following 12 months [Chart T]. By comparison, only 7% of respondents had a positive view of office, but, intriguingly, an almost equal number (29%) expected investor sentiment to rebound as opposed to decline (34%) [Chart U]. This could mean that office may have hit bottom and, to some degree, may be turning around.
Our respondents seemed more assured that multifamily is primed for a recovery, with 56% currently holding a positive view and 48% expecting an uptick in investor sentiment [Char t V]. Of the other asset classes, hospitality seems to have a slight edge over retail [Charts W, X]. They both are viewed positively by approximately the same number of investors (42% for hospitality, 38% for retail), but twice as many had a negative view of retail (18%) than hospitality (9%). Going forward, respondents expected a slightly greater upturn for hospitality (40%) than retail (34%).
What are investors views of multifamily?
Hospitality Industrial
The hospitality industry is slowly making up ground lost to the pandemic, with major East Coast cities leading the way. Survey results reflected these trends. Fifty-four percent of respondents expected cap rates to remain unchanged (54%), with those seeing rates declining (25%) slightly outnumbering those who foresee an increase (21%) [Char t I]. When asked about the most favorable region for hotel investing, the respondents named the Southern Sunbelt (69%) followed by the Northeast (44%) [Chart Q].
The combination of e-commerce, AI, and the CHIPS Act have produced a resurgence of interest in industrial properties not seen in decades. Although half the respondents saw industrial cap rates unchanged (50%), more saw them declining (30%) than rising (20%) [Chart I]. The Southeast (46%), home to some of the largest factories in the nation, was seen as the best place to invest in industrial over the next month, followed by Texas (41%), which has seen large infusions of CHIPS investments, and the Mid-Atlantic, which has the world’s highest concentration of data centers [Chart Q]. When asked to consider niche markets, more than half of the CRE professionals (51%) said they would consider data centers [Chart Y].
What niche asset classes will your firm consider for investment during the next 12 months?
Multifamily
Respondents were bullish on multifamily. More saw cap rates declining (40%) than remaining unchanged (35%), and just 25% felt they would decrease [Chart I]. A likely reason is that oversupply in markets like Atlanta and Dallas is beginning to burn off, and construction starts are down, thanks to higher labor costs and financing constraints. Strong demand promises a return to more robust fundamentals. Our respondents cited the Southeast (61%) and Texas (40%) as the promising places for investment, while 41% highlighted the Northeast, which did not face significant oversupply [Chart Q]. Respondents are also exploring multifamily niches. Thirty-eight percent said they are considering senior living communities, while 29% said they were investigating student housing [Chart Y].
Office
As we have seen, the executives responding to our survey were close to evenly divided about the direction of office cap rates [Chart I]. The largest number saw the Northeast (54%) as the most promising place for office investment over the next 12 months, perhaps looking for properties they can convert to multifamily or renovate [Chart Q]. Also boosting office, they anticipated a gradual return to work, with 42% predicting that employees would be back in the office four days a week at the end of 12 months and 41% forecasting their return three days a week [Char t Z].
What will be the more common work arrangement for office workers at the end of 12 months?
Work from office five days a week
Work from office four days a week
Work from office three days a week
Work from office two days a week
Work from home five days a week
Chose number of days in
When office tenants renew their leases, respondents maintained that they would be looking for concessions (37%) and amenities (28%), perhaps as an inducement for employees to leave their home offices [Chart AA].
What characteristic will be most important for office tenants as they renew their leases?
A little more than a third (36%) believed that most older buildings will be converted to other uses, especially residential, while almost a quarter (24%) asserted that they can be successfully upgraded as offices. Only 20% believed that they will be torn down [Chart BB]. They maintained that the two most important steps governments can take to promote office conversions would be to offer tax credits or abatements (69%) and to streamline permitting processes (45%) [Chart CC]. A niche market that a large number of respondents said they would consider for investment were medical office/life sciences buildings [Chart Y].
What is the likely fate of most older office buildings?
What are the top two most important steps governments can take that will effectively support office conversions to residential use?
Retail
Retail was another sector where respondents leaned toward decreasing cap rates. While half the sample (50%) anticipated no change, nearly one third (32%) expected a decrease as opposed to 18% who saw an increase [Chart I]. The two factors that respondents credited for the resurgence of retail were interconnected e-commerce and brick-and-mortar shopping (42%) and the acceleration of consumer spending (42%) [Chart DD]. Grocery was the prime consideration in their investment decisions. Grocery-anchored suburban shopping centers (35%) were identified as the best location for retail [Chart EE], and grocery topped the list of most important retail segments for the next 12 months [Chart FF]. The Southeast Sunbelt, the Northeast, and Texas were seen as the prime locations for retail [Chart Q].
Chart CC
Adjusting to the New Reality
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“The pandemic created an opportunity for the next generation of investors to get into the mix.”
—Respondent
Comment
The pandemic caused massive disruption to the commercial real estate market, affecting asset classes in divergent ways. Now that the market has begun to settle down, it has become clear that these changes, while profound, are not insurmountable. This survey painted a picture of investors reentering the market cautiously and at their own speed.
There was, however, a firm consensus among the respondents that that the dynamics of the commercial real estate market have fundamentally changed—and that it will be a long time, if ever, that interest rates fall back to the 2% range, that insurance premiums will decline, and that Americans will be back in the office five days a week. Dealing with this new reality, they asserted, may require a fresh outlook and a different skill set. As one respondent said, “I believe this period could usher in a changing of the guard.”
Citrin Cooperman” is the brand under which Citrin Cooperman & Company, LLP, a licensed independent CPA firm, and Citrin Cooperman Advisors LLC serve clients’ business needs. The two firms operate as separate legal entities in an alternative practice structure. The entities of Citrin Cooperman & Company, LLP and Citrin Cooperman Advisors LLC are independent member firms of the Moore North America, Inc. (MNA) Association, which is itself a regional member of Moore Global Network Limited (MGNL). All the firms associated with MNA are independently owned and managed entities. Their membership in, or association with, MNA should not be construed as constituting or implying any partnership between them. Published 2025.
