Looking out to 2024, a recent Marcus & Millichap report expects commercial real estate development to slow, based on “elevated” interest rates.
Additionally, construction materials costs remain elevated on a historical basis (up 33.5% above pre-pandemic levels), despite a retreat in shipping costs and the average prices of steel and gasoline in recent quarters. Wage growth was up 5.8 percent in 2022.
Projects that have already broken ground or locked in financing are moving forward, but banks have been executing fewer construction loans relative to previous years. Lenders are tightening their underwriting in response to increased risk exposure. Loans that are secured loans are at rates well-above measures recorded prior to the health crisis.
Industrial sector development is needed, but it slowed in Q4 by 40% compared to the first three quarters and further slowing is likely. Amazon’s decision to halt its ambitious warehouse starts for the next three years is another indication.
The total amount of square footage set to be delivered for both office and retail properties is projected to increase year-over-year in 2023, but new proposals in these sectors are showing signs of deceleration.
“The limited competition from new supply should aid performance metrics at existing retail and office properties,” according to the report.
The apartment sector is an outlier, as it continues to see record inventory growth, according to the report – completions in 2023 are expected to reach the 400,000-unit mark for the first time in over 30 years.
Marcus & Millichap finds that multifamily project starts during February of this year reached the second-highest monthly measure in three decades.