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As we approach the second half of 2024, the commercial real estate (CRE) landscape is poised for strategic investment opportunities. This rings true both quantitatively and qualitatively.
Qualitatively or narratively, we can echo GreenStreet Advisors in noting that CRE prices have stabilized but remain 20% below their 2022 peak. In other words, we may be at or near the bottom, creating an opportunity for those willing to enter the ring.
Another way of looking at it is that cap rates have expanded alongside interest rate rises. As interest rates stabilize and eventually drop, this creates an opportunity for ‘cap rate compression.’ And the opportunity to tap into higher exit pricing due to interest rate movements.
Quantitatively, we can note that the U.S. remains drastically undersupplied in housing (to the tune of 4-7 million units). Various other market and sector-specific trends point to current opportunities across CRE asset classes.
This is exactly what EquityMultiple’s Investment Framework model seeks to identify, using first and third-party data and algorithms.
Leaning on this framework, we’ll take a detailed overview of the top CRE markets and sectors, highlighting areas with robust growth potential and emerging investment opportunities.
Market Overview
EquityMultiple’s Investment Framework ranks markets based on a proprietary scoring system, considering factors like market quality, demographics, and investment opportunities.
The top markets for the second half of 2024 include Miami, Fort Lauderdale, Orlando, and Dallas/Fort Worth, each demonstrating strong growth metrics and investment appeal across various CRE sectors.
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While this Investment Framework model incorporates various signals and sector-specific weighting, it relies heavily on market revenue per available square foot (or MREVPAF) projections in the coming years.
Here is what the model tells us heading into the second half of the year:
Residential Sector
Top Markets:
- Houston
- Miami
- Austin
- Seattle
- Boston
Key Trends
The housing market is settling down after a pandemic surge. Rent increases are expected to slow to a steady 2% nationwide over the next five years.
However, high mortgage rates are making it harder for people to buy, so they’re turning to rentals instead. This will likely cause rents to keep rising in cities with limited housing availability, like Miami and Austin.
Additionally, the desire for homeownership is facing financial hurdles, and the work-from-home trend is increasing the demand for single-family rentals, especially in suburbs and areas on the outskirts of cities.
However, despite elevated interest rates and contrary historical trends, single-family homes have not become cheaper. Prices may soon continue along the same improbable upward trend.
The supply pipeline for new apartment inventory thins considerably in the second half of 2024 and in the coming years.
Taken together and alongside other factors, multifamily investments may benefit from both reduced supply and increased demand (in the form of a current housing shortage and increasing cost of home ownership).
These five markets may be particularly appealing, but the investment thesis for multifamily should remain strong across the board for years to come.
Industrial Sector
Top Markets:
- Miami
- Fort Lauderdale
- Philadelphia
- Palm Beach
- Atlanta
Key Trends
The rise of e-commerce continues to fuel the need for industrial space, especially for warehouses crucial for last-mile delivery.
This is good news for areas close to major ports and populated areas, like Miami and Fort Lauderdale. These locations are ideally situated to handle the surge in online shopping.
Beyond e-commerce, global events and adjustments in supply chains are also impacting industrial space demand. Companies moving production closer to home (onshoring) or to nearby countries (nearshoring, like to Mexico) are leading to increased demand for industrial space in the Midwest and Sun Belt regions.
While there has been a recent slowdown in demand, causing a slight rise in vacancy rates, the long-term outlook remains positive. The ongoing growth of e-commerce and the broader logistics sector are expected to continue driving demand for industrial space in the coming years.
Retail Sector
Top Markets
- Miami
- Austin
- Phoenix
- Orlando
- Boston
Key Trends
Consumers are tightening their belts and focusing their spending on essentials. This shift benefits businesses that provide groceries, fitness services, and medical care.
Retail areas with a growing population and affluent residents, like Miami and Austin, are expected to thrive in this environment.
Meanwhile, strip malls and power centers, which typically house essential service businesses, have shown resilience coming out of the pandemic.
Occupancy rates are back to normal levels, making them attractive investment opportunities. Locations with high customer traffic and strong spending power, like Phoenix and Orlando, are particularly promising.
Self-Storage Sector
Top Markets
- Salt Lake City
- Miami
- Nashville
- Palm Beach
- New York
Key Trends
- Demand Fluctuations: The self-storage sector is experiencing demand fluctuations due to a weaker housing market and cautious consumer behavior. However, long-term growth is supported by work-from-home trends and the need for additional storage space.
- Supply Constraints: High construction and financing costs are limiting new supply, which could drive future rent growth in high-demand markets like Salt Lake City and Miami.
Office Sector
The self-storage industry is facing some bumps in the road. Demand has softened due to a sluggish housing market and people being more careful with their spending.
However, there are still reasons for optimism in the long run. The work-from-home trend continues to create a need for extra storage space, and that’s not likely to change anytime soon.
Another factor helping the self-storage sector is the limited construction of new facilities. The high cost of building and financing these spaces is keeping a lid on new supply.
This could actually lead to higher rental rates in the future, especially in markets where demand is already strong, like Salt Lake City and Miami. With fewer new options, existing facilities will be in high demand, potentially driving up prices.
Top Markets
- Miami
- Orlando
- Fort Lauderdale
- Tampa-St. Petersburg
- Phoenix
Key Trends
The rise of remote work is throwing a curveball at the office space market. With many employees working remotely or following hybrid schedules, office vacancy rates and subleasing (when companies rent out unused space to others) are rising.
This isn’t the case everywhere though. Cities like Miami and Orlando, which have supportive regulations and a focus on essential industries that require in-person work, are showing more resilience.
The quality of the office space is also playing a role in this changing landscape. Lower-grade office buildings (Class B assets) are seeing their values drop significantly. On the other hand, high-quality office spaces with attractive amenities and situated in prime locations still attract tenants.
Companies are willing to pay a premium for these desirable work environments that cater to the needs of a hybrid workforce.
Final Thoughts
The second half of 2024 presents diverse opportunities across the CRE sectors.
Strategic investments in top-ranked markets like Miami, Fort Lauderdale, and Orlando can offer robust returns – driven by demographic trends, economic resilience, and sector-specific growth drivers.
Investors should leverage detailed market analysis and sector insights to make informed decisions and capitalize on the evolving CRE landscape.
The universe of potential CRE investments is large and varied. We may or may not be at the bottom of the market, but in hindsight we will likely see that we are close to it.
It is therefore wise for self-directed investors to diversify across sectors, across private real estate equity and debt, and at different points in time to maximize the chance of investing on an attractive basis.
EquityMultiple makes passive commercial real estate investing easy for self-directed accredited investors. The firm serves thousands of individuals across the U.S., including many physicians, and has paid over $300M in distributions across its 9 year operating history.
