Following the massive societal changes observed in the wake of COVID-19, we’ve observed a large-scale transition away from traditional office and retail spaces in favor of work-from-home employment and online e-commerce. Headlines of empty office buildings and questions on the necessity of in-person overhead have led many have view the commercial real estate world as being in peril or at risk of collapse. 

However, we haven’t observed that kind of calamitous industry-wide downturn over the past year. While some sectors of the commercial real estate industry have certainly seen significant slowdowns, commercial real estate acquisitions and development as a whole remain robust and have begun to adjust to the new real estate demands of our post-COVID world. 

During his recent appearance on the National Land Podcast, National Land Realty’s Director of Commercial Real Estate, Cory Bowes, explains what he’s seen in the commercial real estate market in 2023, factors currently influencing market conditions, and what investors and developers alike can expect to see in 2024.

Which Commercial Real Estate Markets Saw Success in 2023?

In 2023, the commercial real estate market remained relatively strong in the face of inflation and rising interest rates. Residential developments, both single-family and multi-family, continued to comprise a large portion of commercial real estate deals in 2023, likely in an effort to address nationwide demand for available, affordable housing.

One of the largest trends that’s continued since 2020 has been the migration of people out of urban centers and into areas with a comparatively lower cost of living, such as Southeastern states. Bowes spoke to this, stating, “We saw this migration of both people and money happen during and after COVID, and as companies started to reassess where they wanted to be, remote working became this kind of new way of life if you will. People started leaving these urban centers and coming down to the sunbelt, and we’ve seen that through the transactions we did in 2023. North Carolina, South Carolina, Georgia, Florida, and Texas were some of our real hotbeds for commercial development, and our top three sectors were single-family housing, multifamily, and light industrial.” 

Cory went on to explain that some of the reasons for this housing boom in Southeast states include lower property values making purchases and construction more affordable and appealing, in addition to lower tax bases and the booming tech and health industries creating available local jobs.

Increased Demand for Warehousing

Warehousing spaces also comprised a large percentage of commercial real estate deals in 2023, speaking to the increased demand for fulfillment centers in the wake of COVID. While the need for traditional office and retail spaces declined, increased e-commerce and delivery of goods to homes and businesses has led to the development of more fulfillment centers for e-commerce giants such as Amazon.

Bowes expanded on this shift, explaining, “I think we saw that the traditional brick and mortar commercial was down more than 50% in 2023 according to CoStar. If you just drive around, you’ll see how many empty offices are in your downtown areas, and that’s because remote working is so prevalent. So there’s a lot of open lease space, especially in high-rise buildings. Even in suburban areas, there are a lot of empty lease spots in your commercial convenience areas. We’re noticing this huge trend of pullback from people walking in and buying their retail because they’re having it delivered to their doorstep and everything’s going more ecommerce.”

What to Expect From Commercial Real Estate in 2024?

While a lack of available inventory is likely to be a struggle across many real estate markets in the United States, many anticipate commercial developments to remain strong throughout 2024, especially in residential housing and warehousing which saw strong performance in 2023.  

Despite some slowdown in new developments in recent years, Bowes was confident that we’ll continue to see an upswing in new developments in 2024, stating, “What we’ve seen is that when interest rates started to go up, builders pulled back and recapitalized a little bit. They looked at their deal flow, how many lots they currently have, what their absorption rate is, and they’ve retooled their business model some and now they’re back at it again. 

So the throttle has been pushed back forward and I think that’s going to continue through 2024, especially on housing. There’s still a shortage and that’s still driving [development], but capital is still out there. There’s still a lot of capital active in real estate markets, and land in particular is one of the oldest assets in the world. We’re not making more of it, so people don’t mind putting their money in the dirt because it does perform well and it’s a great way to hedge against inflation. So we do see the capital marketing continuing to be active here.”

Demand for Housing Holds Strong in the Face of Limiting Factors

Despite lingering supply chain challenges from COVID, demand and production for housing developments remains strong in the United States. Speaking to this, Bowes stated, “It’s not slowing down, we’re as busy as we’ve ever been. You also have to think about it from this perspective: these development groups have to think years in advance because it takes multiple years to go through the entitlement process, get funding in place, and start moving dirt. So they’re always thinking ahead.

The other thing that’s impacting us and every sector is that the workforce and labor markets are still inflated. Materials have come down some in cost, but there’s still a supply issue. We still have a backlog of supply chain problems from COVID. So some of these things from COVID are now transitioning downstream and impacting development itself. But I really think it’s more of your labor cost and finding qualified labor able to practice in the construction fields. It’s also getting crews on site within a given time, I hear every day that more and more builders who are vertically integrated are having a problem finding those services now.”

Assuming that developers and investors can contend with shortages of available labor and redirect their focus away from traditional retail or office spaces towards more burgeoning markets, 2024 is looking to be a relatively stable year with many new developments already underway. 

If you’ve got questions about commercial real estate development in your area or need to find the right site for your next project, contact Cory Bowes at Cbowes@NationalLand.com or reach out to your local Land Professional today!