Rent reverses, office vacancy stays high: What’s next in 2024?
The roller coaster ride of the real estate market in 2023 left investors uncertain about where the ride is heading next. Rent began to reverse, office vacancy remained near record highs, banks failed, and lending became tricky. As we enter 2024, it’s crucial to assess the current state of affairs and anticipate what lies ahead.
Renters gain upper hand as apartments flood the market in 2023
Renters across the country received some reprieve in 2023 as a rush of newly built apartments flooded the market. This increase in supply gave renters more options to choose from and helped cool down the escalating cost of monthly rent. The news was welcomed by many, including investors who were concerned about prolonged high interest rates if the Federal Reserve failed to control inflation quickly. While rent is still higher than it was three years ago, it fell by about 1.1 percent in 2023, according to Apartment List.
Office buildings face uncertain future as businesses adapt to ‘new normal’
The return to the office became a subject of debate in 2023 as businesses navigated the post-pandemic landscape. While some companies, like Redfin, announced a part-time return to the office, many commercial buildings remained largely unoccupied. This ongoing vacancy trend has impacted the value of commercial real estate. Experts predict that businesses will continue to adjust their work policies, which will influence demand and values for office buildings. Additionally, nearly $150 billion of loans on office buildings are coming due this year, leading many to believe that owners and lenders will need to reassess values, debt, and capital structures for these properties to succeed.
Falling inflation eases pressure on Federal Reserve to keep interest rates high
By mid-2023, economists began seeing signs that the Federal Reserve’s efforts to increase interest rates were effectively curbing inflation. Positive reports about inflation trends throughout the year gave investors and economists hope that the Fed would soon reduce interest rates, thereby decreasing borrowing costs. In December, the Fed announced its projection of three rate cuts in 2024, which resulted in stock markets reaching record highs. Investors now anticipate a significant decrease in the federal funds rate, creating a more favorable borrowing environment.
Airbnb takes aim at the hotel industry, looks to attract a new generation of travelers
In 2023, Airbnb set its sights on the hotel industry, actively working to capture market share from its larger rival. Airbnb’s CEO, Brian Chesky, expressed a desire to moderate prices and appeal to a whole new generation of travelers. While hotels possess certain advantages, such as regulatory compliance in some cities, Airbnb continues to grow despite setbacks. For instance, Airbnb faced restrictions in New York City that limited thousands of short-term rentals. However, the city accounted for less than 1 percent of Airbnb’s total revenue. The threat to Airbnb’s expansion plans lies in the possibility of more major markets implementing New York City-like regulations in 2024.
Conclusion: Investors get creative in a high-rate environment as apartment pipeline dries up
The lack of supply and high interest rates in 2023 posed challenges for real estate investors in the single-family rental market. In the absence of distressed properties, investors had to think outside the box and find alternative ways to work with homeowners. Strategies such as subject-to financing, where investors assume payments on existing mortgages, and seller carryback agreements, where property owners retain ownership but agree to terms based on the property’s cash flow, became popular. Additionally, the development pipeline for new apartment buildings dried up due to high lending costs. The completion of buildings currently under construction will contribute to an already saturated market, putting downward pressure on rents. However, as supply decreases in the coming years, demand is expected to catch up, leading to a rebound in rents.
Analyst comment
Positive news: Renters gain upper hand as apartments flood the market in 2023
Negative news: Office buildings face uncertain future as businesses adapt to ‘new normal’
Positive news: Falling inflation eases pressure on Federal Reserve to keep interest rates high
Neutral news: Airbnb takes aim at the hotel industry, looks to attract a new generation of travelers
Market analysis: As apartments flood the market, renters will have more options and lower rent prices in the near term. The uncertainty surrounding office buildings and shifts in work policies will impact demand and values. Falling inflation may lead to decreased interest rates, benefiting investors. Airbnb faces potential challenges from increasing regulations. The lack of supply and high interest rates pose challenges for real estate investors, but as supply decreases and demand catches up, rents are expected to rebound.
