2023 marked a year of adjusting to a new normal as it pertains to interest rates, creating a challenging landscape for both investors and homebuyers. The Federal Reserve raised rates to combat inflation pressures, with rates skyrocketing to their highest level in decades, reaching nearly 8% in October 2023.
As we begin a new year, predictions are in and it seems that investors may be able to breathe a little easier. While rates won’t reach the all-time lows that we saw just a few years ago, interest rates have begun to decline and are predicted to continue as inflation pressures have also eased.
What Does This Mean for Investors?
In short, there’s opportunity.
With interest rates coming down, by the end of 2024 it’s forecasted that transaction volume for commercial real estate (CRE) will pick up steam. PwC predicts more commercial mortgage-backed securities (CMBS) will be available, along with increased investment opportunities.
PwC states they are “optimistic as we see significant opportunities for patient and creative market participants across the investment landscape who are willing to take the long view.”
Where’s the Biggest Opportunity for CRE Investors?
In 2024, there will be strong demand for apartments and other multi-family properties. Mortgage rates for 30-year fixed interest rates have seen an average of 7.52% as of December 2023, while the average 15-year mortgage rate has floated between 6.7% and 7.4%.
Sam Khater, chief economist at Freddie Mac, reported in a press release, “The 30-year fixed-rate mortgage remained below 7% for the second week in a row, a welcome downward trend after 17 consecutive weeks above 7%.”
While mortgage rates may see a dip, for many the rate may still be out of reach, creating a strong market and increasing property values for multi-family investments.
Industry Sectors to Watch
The industrial space is also seeing a boom, especially in the trucking and warehouse sectors. After a disruption during the pandemic, industrial real estate has recovered due to lower rates, a trend in relocating operations closer to home, and a strong increase in consumer spending.
Another sector that may come as more of a surprise is office space. While there is still vacancy with Class C office space, Class A office spaces are experiencing a surge. Class A offices have high quality design and finishes, include state of the art systems, and sought-after amenities.
As the return to the office is seeing a recovery, it's these nicer office spaces that will succeed. Renovating Class C office space into Class A can be a great investment as this sector sees more success.
Forecasting Interest Rates for the Second Half of 2024
More conservative predictions forecast lower rates to set in during the second half of 2024, while others anticipate lower interest rates as early as March, especially as the current inflation rate, around 3%, is close to the Fed’s target inflation rate of 2%.
With the Federal Reserve potentially reaching its goal sooner than anticipated, interest rates could also follow sooner than later, offering more flexibility for investors and allowing businesses to borrow at a lower rate.
When Should You Move Forward with Your Investment?
The short answer is that if you find an investment property that fits your needs and is within your budget, now is the time to buy.
With unprecedented events like the pandemic, it’s only in hindsight that homebuyers made the right move to purchase before then. While we may not enjoy those historic low-interest rates any time soon, with inflation continuing to retreat and a steady decline in interest rates, 2024 promises to offer more investment opportunities.
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