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As we begin 2024, commercial real estate investors are keeping a close eye on the trends most likely to dominate news headlines and impact portfolio performance in the coming year. Most importantly, industry players are learning to cope with the highest borrowing costs seen in over 15 years.

At the same time, traditional banks have pulled back from the commercial lending scene in response to rising vacancy rates and falling property values, and this has altered the financing landscape for investors and developers. Each of these is worth exploring in depth to gauge how investors might position their portfolios going forward.

1. Necessity-Based Assets And The Strain Of Capital Availability

Across the commercial real estate industry, investors are looking for clues as to whether the Federal Reserve will continue to raise interest rates through the rest of 2024 or reverse course and lower rates as inflation moderates. There are mixed signals in the marketplace, but there is also a growing consensus that rates could remain elevated at or near current levels throughout the year. As investors underwrite deals, they will continue to incorporate updates based on any clues that come out of the Fed, inflation data and broader macroeconomic growth trends.

Regardless of where interest rates land this year, it’s clear that many of the national and regional banks have pulled back on extending credit to commercial real estate investors. These trends have had a significant impact on local commercial real estate operators that tend to focus on relationships with local banks for financing acquisitions. Larger operators that maintain relationships with diverse groups of lenders have experienced limited fallout.

2. Big Mergers Dominate Headlines In The Grocery Spac

Throughout 2023, news in the grocery industry revolved around the merger between Kroger and Albertsons. At the time of the announcement in October 2022, many in the industry speculated that it would take several months or longer for the deal to work through the regulatory approval process, and in 2024, there are still lingering questions about the deal.

Key regulatory concerns include the potential for reduced competition in the grocery industry as two of the top players consolidate into one, increased prices for consumers, and job cuts due to potential store closures. To allay these concerns, Kroger and Albertsons issued a joint announcement in September that they would sell over 400 stores to C&S Wholesale Grocers along with several private brand labels, distribution centers and offices.

In another episode of industry consolidation, Aldi announced that it would acquire all outstanding shares of Southeastern Grocers Inc., the parent company of Winn-Dixie and Harveys. This would add 400 Winn-Dixie and Harveys stores to the Aldi portfolio. The terms of the deal weren’t made public, but Aldi said it will rebrand some locations and will continue to operate others under the Winn-Dixie and Harveys brands.

3. Multifamily Assets: Strong Demand And Limited New Development

Reduced capital availability has limited the ability of developers to bring new multifamily units online. Construction starts remain muted, and there are concerns that the volume of new multifamily units delivered to the market in 2024 could lag behind demand. If this trend continues, it has the potential to keep occupancy high, and as the supply of new units remains constrained, rent growth could pick up in 2024.

4. Industrial Real Estate Rides Macro Trends Into 2024

Successful industrial real estate investments often support local commerce within communities and neighborhoods. This asset class, comprised largely of distribution centers, warehouses and other logistics centers, performed very well during the pandemic as online shopping became a way of life and e-commerce activity took a significant leap forward. Coming into 2023, investors were concerned that these assets might come under pressure as pandemic-era restrictions had ended and consumers returned to physical stores.

However, recent reports by the U.S. Census Bureau show that e-commerce in the United States continues to grow steadily and remains a bright spot in the economy. Recently published data pinned total U.S. e-commerce retail sales at $271 billion at the end of the third quarter of 2023, which represents an increase of 31.5% since the third quarter of 2020. E-commerce sales now total 15.6% of all U.S. retail sales, up from 14.1% in the third quarter of 2022.

The data indicates that e-commerce growth is a structural trend that was accelerated by the pandemic but will continue in the post-pandemic period as well. Investors in this asset class have done well over the last several years and appear primed for strong performance into 2024.

What Could Necessity-Based Real Estate Investors Expect In 2024?

Necessity-based real estate, including grocery-anchored, multifamily and light industrial, continues to perform well and looks poised to ride macroeconomic trends to another strong year in 2024. As economic trends continue to work in favor of these assets, the prospect of strong performance is a possibility, especially for investors who invest before sidelined institutional capital moves in to take advantage of strong fundamentals.

Investors who are interested in gaining exposure to commercial real estate should consider the different options for doing so. Publicly traded investments are available to all retail investors, and accredited investors may also consider working with private equity sponsors focused on commercial real estate.

Investors who choose to work with a private equity sponsor could benefit from a truly passive investment managed by a team of professionals with experience in commercial real estate acquisitions and asset management. Further, sponsors that focus exclusively on commercial real estate assets tend to bring a diverse group of offerings to investors.

Those who meet accreditation requirements might consider speaking with investor relations representatives at one or more private equity firms. These professionals are well-versed in the nuances of private equity real estate investing and can discuss the offerings they currently have available.

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