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CEOs Predict 2024 Fates , AI , Interest Rates on Their Minds

Compiled By Diane Walsh Editor , COMMERCE Editors Note :

For this popular feature in our December issue , we are again highlighting New Year predictions from NJ CEOs , managing partners and industry executives . This year we are also pleased to present an introduction from William Hanson , a former CIANJ chairman , who gives us a deep drive into the real estate industry , an important economic base for our state .

By William C . Hanson SIOR , President , NAI James E . Hanson
2024 Outlook : Navigating Uncertainty in New Jersey ’ s Commercial Real Estate Landscape
At the risk of sounding repetitive , ‘ uncertainty ’ will once again be a key buzzword in the commercial real estate industry as we enter 2024 .
While the overall market will remain strong , a combination of macroeconomic factors and industry-specific trends will bring challenges that demand creative solutions .
Looking back at 2023
The good news is that , in a relief to many , the nation has managed to avoid the severe recession that some had predicted for 2023 resulting from rising interest rates and unstable macroeconomic conditions . While the Federal Reserve ’ s “ soft landing ” strategy has shown signs of success , it has had profound ripple effects throughout the commercial real estate industry .
Deal flow , particularly in the second half of 2023 , has slowed considerably . The probable final rate hike in early 2024 will continue to hang over the industry and cause deal volume to lag .
In addition to rising interest rates , high construction costs and continued supply chain delays have also placed further pressure on the market . Outside pressures stemming from geopolitical turbulence and domestic political dysfunction have reinforced the cautious approach among commercial real estate professionals as we flip the calendar to 2024 .
Capital Markets
The capital markets – the backbone of the commercial real estate industry – were most affected by the challenging economic picture in 2023 . Lenders across the board have been noticeably hesitant to lend in 2023 which caused pressures on every aspect of the industry . Their hesitancy stems from three core factors – rising interest rates , uncertain bank health and the growing valuation gap between buyers and sellers .
Interest rates underpinned much of the capital market discussion over the past year . We hope to have a better idea of the rate environment in the first half of 2024 as the Federal Reserve sheds more light on its long-term plans . Unfortunately , the capital markets are left to speculate as they await clarity .
The rate environment most notably played a part in the high-profile failure of several regional banks in early 2023 . In the wake , many lenders and banks have begun to rethink their commercial real estate allocations and lending practices . While the banking system remains strong , banks and regulators continue to be concerned about economic instability causing further issues in the system .
The final complicating factor is the valuation gap that stems from the turbulence and the rapid price fluctuations seen in several asset classes over the past several years . Obviously , buyers want to spend as little as possible and sellers want to make as much money as possible . In an environment where pricing is so uncertain , the gap between those two disparate interests is , in many cases , a chasm .
While there is a tremendous amount of dry powder on the sidelines right now , the difficulty in bridging this gap is making closing deals challenging and time-consuming . This will continue to be a significant issue across asset classes in 2024 .
The industrial sector remains the bright spot in New Jersey ’ s commercial real estate landscape . Pricing acceleration continued throughout 2023 , albeit at a slower pace than the pandemic-driven frenzy of 2020-2021 . However , the increased availability of sublease space and a pullback from large single-tenant users have driven up availability and placed downward pressure on pricing .
Larger tenants will continue to reassess their space needs and search for opportunities to consolidate in 2024 . This dynamic will provide tenants with slightly more bargaining power than they might have had just a few years ago . Nevertheless , the financing environment and public backlash have made the development landscape more challenging and will limit new supply coming to the market . While the market will remain robust , it is gradually returning to conditions resembling the pre-pandemic era but is well-positioned for continued strength .
Cover : William C Hanson , SIOR , President , NAI James E . Hanson
Acting as a counterbalance to the strength of the industrial sector , the office sector remains the most challenging asset class in New Jersey . The much-anticipated “ Great Return to Work ” has yet to fully materialize and many leases negotiated before the pandemic will be turning over in 2024 and 2025 . As a result , 2024 will be a year where many tenants will truly address their return-to-work strategies while providing critical insights on the impact of COVID-19 on office dynamics .
In this tight market , Class-A trophy office spaces are ideally suited to attract tenants aiming to enhance their employees ’ experiences . In contrast , lower-quality office spaces face a more extended path to recovery . Conversions to medical offices or multifamily are viable options in some cases , but not all offices can be converted . Banks and lenders also face challenges in navigating the needs of struggling borrowers and the potential acquisition of underperforming office buildings .
The health of large office landlords has also forced tenants to place heightened scrutiny on landlords ’ reputations and history when making leasing decisions , underlining the importance of maintaining a good track record in property management .
Our state ’ s housing shortage has underpinned a strong and competitive multifamily sector over the last several years but rising
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