Stay in the Know: Commercial Real Estate Trends

Global economic shifts, evolving societal demands, and rapid technological advancements have all had a significant impact on the commercial real estate world in recent years. 

2023 brought with it economic uncertainty. This was influenced heavily by fluctuating company plans for employees’ return to the office, increased interest rates, and the e-commerce boom. 

But optimism for the coming year remains intact. Some, in fact, look to this year as a time for the industry to continue to stabilize and find new footing as it continues to recover from the impacts of COVID. 

Adapting to new “norms” around work, life, and shopping is at the forefront of this discussion, suggesting that the next era of commercial real estate is not just about buildings and spacing but about the industry’s ability to evolve to meet new modern values.

For developers, property managers, and contractors, there’s a significant opportunity to lead the way in implementing cutting-edge technologies and redesigning workspaces to accommodate changing public needs. 

This article will take a look at some of the key trends facing the commercial real estate world right now, including strategic insights for construction, renovation, and management to meet changing tenant and investor demands.

Continuing Shifts in Workplace Designs

By far the biggest trend affecting the commercial real estate industry is the continued evolution of workplace environments.

Throughout 2023, the use of office spaces nationwide fluctuated. Many companies experimented with various models to balance productivity with employee well-being. 

As we start to see more big companies firm up their return-to-office strategies, the resulting changes seem to be less about getting employees back in the office and more about making the office a place where employees actually want to be. 

As such, many property owners are planning upgrades to their facilities. This will be done to attract tenants who are searching for upgraded offices that will appeal more to their employees. 

As the popularity of hybrid work environments—where employees only need to come in part of the week—grows, more and more tenants are looking for smaller, amenity-rich spaces. Features like on-site gyms, collaborative working spaces, recreational facilities, and cafeterias are becoming more desirable. 

Ongoing Reimagining of Property 

With a surplus of traditional office spaces growing nationwide due to evolving office needs, new office construction is expected to remain modest in 2024. 

For some, though, reimagining of vacant office spaces provides a new opportunity. 

According to Cushman & Wakefield, approximately 60% of the current US office inventory requires significant upgrades or reinvestment. Another 20% were viewed as almost obsolete unless substantial modifications were made. 

Adaptive reuse of these spaces is being incentivized by some local governments to help balance out conversion costs and meet societal needs. This includes initiatives such as converting underutilized office buildings into affordable housing,

But it doesn’t stop with office spaces. 

Retail spaces, for example, are also being transformed by many property owners seeking ways to attract the public.

For example, in some areas open office spaces are being converted into entertainment centers. This is a strategic move that revives these localities. It also enhances the overall attractiveness and value of the properties.

Locally, many developers are championing adaptive reuse projects all over Tennessee, particularly in urban areas like Knoxville and Nashville.  

This trend involves revitalizing vacant or underutilized buildings for modern uses that cater to the specific needs of the community.

Additionally, converting historic warehouses and other vacant properties provides a new opportunity for the region to preserve its rich heritage while fostering economic growth. 

It’s a win-win for community members and real estate developers alike. 

Sustainability and Green Building Growth

In recent years, it has become clear that sustainability is transforming from a niche interest to a mainstream requirement in commercial real estate.

In fact, it’s becoming an important piece of criteria for tenants and investors alike, affecting property value and marketability nationwide. 

Green building certifications are gaining new visibility, along with advancements in renewable energy sources, energy-efficient technologies, and eco-friendly building materials. 

Expect to see sustainability awareness stay at the forefront of commercial real estate conversations in 2024 as property managers and investors increasingly incorporate sustainable practices into their projects.

As the market continues to evolve, sustainable properties are proving to be valuable investments. They align with global environmental objectives while meeting the demands of a rapidly growing segment of sustainability-focused consumers.

Worldwide Changes in Consumer Behavior

Changing global consumer behaviors, most notably the rise in e-commerce will continue to have a huge impact on commercial real estate in the year ahead. 

More and more consumers are gravitating towards online shopping for its convenience and the variety it offers.

Though brick-and-mortar retail opportunities remain consistent, many retailers have already begun to anticipate and adapt to these changes. 

As a result, many property managers and developers have begun reimagining physical stores to create immersive, personalized experiences that can’t be found online. Others are starting to rethink the utility of large retail spaces, pivoting towards mixed-use developments that incorporate leisure, entertainment, and lifestyle services to attract the public. 

In addition to all of that, there is a growing demand from consumers for local spaces that support sustainable and community-oriented lifestyles. Consumers are increasingly drawn to locations that offer green areas, health-focused amenities, and proximity to public transportation options. 

This preference is fueling momentum in urban renewal projects and developments that prioritize environmental sustainability and community integration.

Commercial Real Estate Technological Advances 

Technological advancements will be a force that impacts the commercial real estate space in the years to come. 

More and more property managers are finding it necessary to make spaces more efficient and adaptable to evolving market needs. 

Smart building technologies, like the Internet of Things (IoT), are revolutionizing property management by enabling real-time monitoring and control of building systems like lighting, security, and HVAC. 

Consider the potential for IoT’s role in smart building management, for example.

New technologies have enabled much more precise control over building systems such as heating, air conditioning (HVAC), lighting, and ventilation. 

With increased sensor ability to adjust conditioning and lighting, for example, based on occupancy and usage patterns, properties can now provide hands-off optimal comfort for tenants and visitors. All while significantly reducing energy expenditure and costs and increasing equipment lifespan.  

As technologies like IoT continue to evolve, the depth of its integration into commercial real estate will also likely expand. Such innovations optimize commercial real estate operations and transform properties into more efficient, safer, and more sustainable environments.

Property managers and developers should stay aware of these innovations, not only to keep pace with ongoing technological advancements. Doing so will also continually enhance asset value, increase profitability, and meet the evolving demands of the market.

Rising Costs of Materials and Labor

In 2024, rising costs of construction materials due to inflation will, no doubt, have an impact on the commercial real estate sector. 

According to recent economic data from the Federal Reserve, a 2-3% increase in construction material is anticipated in 2024. While this is a moderate increase, it is still an uptick from the less than one percent increase in 2023. 

Similarly, the increased global backing of sustainability regulations is strengthening. While long-term operational cost reduction is expected as a result of these sustainability advancements, initial implementation of these new regulations will likely cause temporary cost increases. 

Not to be overlooked, skill shortages are also an important consideration in labor costs that face the commercial real estate industry. 

While, overall, the U.S. construction industry remains robust, skilled labor is at an all-time low. As a result, a 3-6% increase in labor costs is expected in 2024. 

Fluctuating Interest Rates

In 2023, rising interest rates created challenging conditions in the commercial real estate industry. 

There were varying interest rate adjustments as central banks around the world responded to global economic pressures. These changes had far-reaching effects on borrowing costs, influencing both the purchasing power of investors and the overall cost of owning and developing real estate.

However, many predict interest rates will flatten out or decline in 2024. 

If this does occur, lower rates could lead to more construction projects as financing becomes less costly and more readily available. 

How to Adapt

As the commercial real estate landscape continues to evolve under the influence of economic shifts, technological advancements, and changing consumer behaviors, it is important that key stakeholders remain agile and forward-thinking. 

Property owners, investors, and managers will need to embrace the significant trends shaping the industry as they strategically look toward the future. 

This includes adapting workspaces to appeal to community interest, upgrading facilities to meet higher quality standards, and incorporating amenities that can make commercial spaces more attractive to tenants who are gradually returning to office settings.

Adaptive reuse, like vacant office conversion into affordable housing or entertainment centers, doesn’t only meet emerging market needs. It also aligns with community-oriented development goals. 

Incorporating sustainable practices and green building technologies is no longer optional. As public awareness grows, it has become a necessity. One that not only enhances property value but also appeals to environmentally conscious tenants and investors. 

Conclusion 

The commercial real estate industry is adaptable. Optimism in the industry as a whole remains high as the market continues to stabilize. 

In the meantime, property owners, investors, property managers, and tenants should continue to remain adaptable to evolving consumer demands. 

At InterVision, we’re here to help with your commercial real estate construction needs. If you’re considering a commercial space upgrade in 2024, let’s chat about how we can elevate your property together.