CRE commentary: There are multiple challenges ahead, but all is not lost

"Jacksonville continues to benefit from the Florida tailwind and a development pipeline that is well-matched to demand."

  • By
  • | 12:00 a.m. February 9, 2024
  • | 4 Free Articles Remaining!
Christian Oldenburg
Christian Oldenburg
  • Real Estate
  • Share

This should be an interesting year for commercial real estate. 

Last year brought large increases in insurance rates, operating expenses and the cost of capital. Any one of these changes would have been difficult individually. 

Taken together, the result was predictably terrible. Assets were repriced across all property classes, which resulted in a collapse in sale transaction volume and set the stage for several challenging years for those dealing with upcoming maturities or other mandates to transact. 

Unfortunately, most believe this asset repricing will be somewhat sticky. Operating expenses and insurance costs continue to grow (albeit much more slowly), and long-term debt is not likely to get appreciably cheaper. 

Banks, especially small and mid-sized ones, are limiting or cutting exposure to commercial real estate as liquidity concerns linger. Additional regulation aimed at boosting bank liquidity could also drive lending spreads higher. 

To complicate things, leasing velocity is flat or slowing across all product types and net effective rent growth is stalling, recently turning negative in multifamily. All this bad news lands particularly hard with office owners, who are also dealing with a COVID-fueled culture shift of historic proportions. 

But all is not lost. The factors that drove down asset values in 2023 are now priced in and owners are starting to accept that their assets aren’t worth what they were in 2022. This is a critical step toward improving market health as it narrows the bid-ask spread and makes it more likely that property sales will restart in 2024.

Property sales typically pay off unhealthy debts held by the seller and allow for a reset, matching current day underwriting and asset pricing to more sustainable funding structures. 

Additionally, Jacksonville continues to benefit from the Florida tailwind and a development pipeline that is well-matched to demand. Market tops in commercial real estate typically come with a supply overshoot, where overly optimistic developers deliver too much product, leading to a surge in vacancy and a corresponding drag on rent. Fortunately, the only asset class suffering from this in Jacksonville is multifamily. 

While the commercial real estate market will be dealing with challenges for the next several years, we expect 2024 to look like the inverse of 2022, with lackluster volumes eventually giving way to more robust activity in the third and fourth quarter. And the return of transaction volume is exactly what is needed to help the market heal.   

Christian Oldenburg is President of the NAIOP Commercial Real Estate Development Association Northeast Florida Chapter.



Special Offer: $5 for 2 Months!

Your free article limit has been reached this month.
Subscribe now for unlimited digital access to our award-winning business news.