After a turbulent and unexpected 2023, there is widespread concern that commercial real estate will face additional challenges in 2024. While the office sector may remain vulnerable, other sectors remain well-funded and will be supported by a constructive economic backdrop, setting the stage for a transformative year in commercial real estate.

U.S. equity REIT share price and NCREIF (NPI) capital value indices
Rebased to 100 at 1977Q4, recessions are shaded

Line graph showing U.S. equity REIT share price and NCREIF (NPI) capital value indices
Source: NCREIF, NAREIT, Principal Real Estate. Data as of December 31, 2023.

Last year, commercial real estate (CRE) faced its most challenging year since 2009, impacted by the Fed's policy tightening and the regional banking crisis. Consequently, a significant withdrawal of debt capital led to a sharp drop in property sales. The CRE market now faces heightened refinancing risks, with $1.2 trillion of debt maturing by 2025 amidst tough lending conditions and higher interest rates.

While the maturity wall is undoubtedly significant, the overall refinancing risk to the CRE market should be relatively well contained for three reasons:

  1. Given the potential contagion impact in CRE, policymakers are keen to avoid additional stress on the financial system, and would be quick to head off any periods of illiquidity and distress in both CRE and banks.
  2. A resilient U.S. economy is supporting tenant demand across CRE.
  3. Although nearly 20% of the CRE debt scheduled to mature in 2024 is in the challenged office sector, others, such as apartment (more than 30% of the outstanding debt), enjoy stronger fundaments and more secure liquidity.

Given the sector-specific nature of CRE, and the extremely attractive valuations compared to prior years, the main determinant of CRE performance in 2024 will likely be the durability of the economic expansion, rather than refinancing risk. If the Fed can pivot to an easing cycle against the backdrop of ample liquidity and positive economic growth, 2024 could provide a transition point for the CRE market.

Read more about what lies ahead for commercial real estate in our latest market bulletin, Commercial real estate: Debt maturities and investment opportunities.


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