2024: A Challenging Year for Commercial Real Estate

2024 proved to be one of the most challenging years for commercial real estate in recent memory. After years of relatively stable growth, the industry faced an array of unprecedented headwinds that disrupted operations, squeezed profitability, and left many investors reassessing their strategies.

In this blog, we’ll take a deep dive into the various factors that made 2024 such a tough year for commercial real estate, including soaring insurance costs, skyrocketing taxes, stagnating rents, rising utility prices, persistently high interest rates, and an influx of new supply into already competitive markets.

Rising Insurance Costs: Up by 30%+

One of the most impactful challenges in 2024 was the sharp increase in insurance premiums, which surged by over 30%. This spike was driven by several factors, including the rising frequency and severity of natural disasters, costly liability claims, and a tightening insurance market.

Property insurance, in particular, saw steep hikes as insurers recalibrated risk models due to climate-related events like floods, hurricanes, and wildfires. Even properties in traditionally low-risk areas experienced significant premium increases.

For property owners, these rising costs eroded profitability, forcing difficult decisions: attempt to pass on costs through higher rents—risky in a sluggish rental market—or absorb the expenses, reducing net operating income and overall returns.

Tax Increases: Up by 30%+

Adding to the financial strain, property taxes increased by more than 30% in many markets. Local governments, facing budget deficits, raised tax assessments on commercial properties to generate revenue.

These hikes disproportionately impacted high-demand urban areas but also extended to secondary and tertiary markets. Many property owners faced higher tax bills without corresponding increases in property values, further straining their finances.

Stagnant Rents in a Competitive Market

While operating costs soared, rental income remained flat. Economic uncertainty made tenants hesitant to sign long-term leases or agree to rent increases.

The retail and office sectors were hit hardest, as remote work trends and shifting consumer habits reduced demand for traditional spaces. Multifamily properties, though more resilient, also faced challenges as tenants struggled with affordability in the face of rising living costs.

Rising Utility Costs

Inflation and higher energy prices led to significant increases in utility costs, particularly for electricity and heating. For property owners offering utilities as part of rent packages, these rising costs further squeezed margins.

Persistently High Interest Rates

High interest rates continued to pressure the industry throughout 2024. The Federal Reserve’s efforts to combat inflation kept borrowing costs elevated, making refinancing and new acquisitions more expensive.

Investors with variable-rate debt or maturing loans faced especially challenging conditions, with increased financing costs upending profitability and forcing some to inject additional capital or sell properties under less favorable terms.

An Over-Supply of New Properties

The market also contended with an oversupply of new properties, particularly in the multifamily and office sectors. Low interest rates in prior years encouraged aggressive development, but by 2024, changing market conditions left many projects struggling to attract tenants.

This surplus increased competition, leading to higher vacancy rates and forcing property owners to offer concessions to maintain occupancy levels. Older properties, in particular, struggled to compete with newer developments offering modern amenities.

Other Headwinds for Commercial Real Estate in 2024

Other challenges compounded the difficulties of 2024, including supply chain disruptions, increased regulatory scrutiny, and labor shortages.

Labor shortages drove up wages for property management staff, maintenance crews, and construction workers, further inflating operating costs. Delays in renovations and repairs due to staffing shortages created additional financial strain.

Conclusion: Resilience, Opportunity and Optimism for 2025

While 2024 presented significant challenges, it also reinforced the value of strategic investment and thoughtful management in the commercial real estate space. For our apartment syndication business, these challenges underscored the importance of adaptability, innovation, and a commitment to creating long-term value for our investors and tenants.

Despite the headwinds, we’ve focused on enhancing operational efficiency, carefully selecting markets with strong growth potential, and maintaining a hands-on approach to property improvements. These strategies have allowed us to navigate the storm while positioning ourselves for a brighter future.

As we look ahead to 2025, we’re optimistic about emerging opportunities. Stabilizing interest rates, potential shifts in tax policies, and increasing demand for high-quality, well-managed rental housing give us reason to be hopeful. By staying true to our mission of delivering value to our investors and improving the lives of our tenants, we’re confident we can thrive in the year to come.

To our investors, tenants, and partners: thank you for your trust and support. Together, we’re not just building wealth—we’re building communities and a legacy of resilience. Here’s to a successful and prosperous 2025!