What Worked in Commercial Real Estate in 2024?

How have investors in commercial real estate fared during 2024? What success have they achieved?

The typical length of a blog post varies depending on its purpose and audience, with a short-form post typically ranging from 300–600 words. However, in answering the above question, I doubt I can even reach 300 words.

Commercial real estate investments in 2024 have been universally disappointing—continuing the trend from 2023. Adding insult to injury, the public markets have thrived, with public equities on track for over 20% returns for the second consecutive year. Meanwhile, alternative assets like Bitcoin and gold have performed even better, leaving many commercial real estate investors questioning their strategies.

So, it has been frustrating for private market investors of late. But private markets are meant to be an allocation of the total portfolio, not the entire portfolio. I have advocated for an allocation of investable assets of an amount not to exceed 30% to private market opportunities. Private markets have great years, and they have bad years. Public markets have good years, and they have bad years.

At an elevated level, this is how I reflect on private markets in 2024:

·       Multifamily – valuations down 15-30% from the peak in 2022, making it difficult for operators to execute a value-add strategy (or any strategy) and exit for a profit. Investors and operators are stuck in illiquid situations unless foreclosures or forced sales intervened. During the second half of 2024, the pivot in interest rate policy by the US Federal Reserve may have changed the trend in multifamily pricing. Pricing has risen over the final half of 2024. Interest rates have not decreased enough to accelerate refinancings or sales, but it is trending in the right direction.

·       Hotels – public hospitality companies have had great years, but this does not appear to have benefited many of the syndicated deals that are outstanding.

·       Industrial – has been hanging in there, but oversupply issues have started to impact the market.

·       Life Sciences Lab Space – The U.S. life sciences lab sector remains a resilient and dynamic segment of commercial real estate, buoyed by sustained investment in biotech research, pharmaceuticals, and healthcare innovation. However, 2024 performance was very dependent on local market dynamics. While growth has moderated compared to the pandemic-era boom, demand for specialized lab spaces in key markets like Boston, San Diego, and the San Francisco Bay Area continues to outpace supply. Investors and developers are increasingly focused on creating state-of-the-art facilities with advanced infrastructure to meet the unique needs of life sciences tenants. However, rising construction costs and tighter financing conditions have slowed new development, prompting a greater emphasis on retrofitting existing spaces. Regulatory headwinds and uncertainties have contributed to the slowdown as well. Despite these headwinds, the sector’s long-term prospects remain strong, driven by demographic trends and the ongoing need for medical advancements.

·       Retail – I do not play in this space, but I have not heard of any secular strength in this market. I did review one strip mall deal in Georgia during 2024, whose core tenant was a Planet Fitness. My due diligence focused on the Planet Fitness facility in this mall, since I am a loyal PF customer in Massachusetts. There was another PF location a few miles from this subject. In addition, PF has an “audience meter” on their website to allow customers to determine the busy times. This particular location was never busy, rarely registering more than “1 bar.”   I passed.

·       Capital stack considerations – private debt and preferred equity has worked; common equity has not worked. Every new investment I have made during the past 18 months has been in debt and preferred equity, and I have earned reliable monthly income of 10-11% on average. Common equity, I had no “capital calls” nor any distributions syndications invested prior to 2023.

·       Office – The U.S. office sector of CRE continues to face significant challenges, shaped by lingering impacts of remote and hybrid work trends. Office vacancies remain elevated in many urban centers, with landlords struggling to attract tenants as companies downsize or seek flexible leasing options. The flight to quality persists, as tenants prioritize well-located, amenity-rich, and energy-efficient buildings over older, less adaptable properties. Rising interest rates and tightening credit conditions have exacerbated financial pressures, particularly for properties in secondary markets. However, some opportunities have emerged through adaptive reuse projects, with underutilized office spaces being converted into residential or mixed-use developments to meet shifting market demands. I am constructive on the office market over the coming 3 years. I will not be participating, but it is something to keep an eye on.

In summary, the only positives in 2024 appeared to be a mid-year bottoming of the multifamily market, driven by lower interest rates, and continued rent growth in most markets (outside the Sunbelt). I will continue to watch Crowdstreet.com as a barometer for new deals and the general health of commercial real estate markets, but of course I would never invest in one of their “deals.”

But let us not dwell too long on the past; the future matters more. 2024 has offered ample time for introspection, with the aim of better aligning future investments with personal financial goals. As I enter my early 60s, I am considering my age and stage in life while prioritizing what I hope to achieve in 2025:

1.       Rebuild liquidity. The past two years are best characterized by limited liquidity opportunities within an existing private market portfolio. There have been no refinancings or exits. I want to rebuild a minimum liquidity for $200,000 to be able to take advantage of new distressed deals or anything else life throws at me. Quite a sexy goal.

2.       Create a position in Bitcoin and Gold. I know this blog is the “Private-Passive Investor,” but I am also a sucker for diversification in best-of-breed assets.  Not talking about altcoins or Hauk Tuaa coin (pardon the spelling), just Bitcoin. Gold, not silver or platinum etc. I do not have a target investment size position for this category, as this goal will be competing with priority #1 above.

3.       Existing CRE investments. Hope is my strategy. To start regular distributions on 25% of my positions would be a fabulous result in 2025. To have an exit would be divine. My goal is to watch, understand, and learn.

4.       Add to Existing “Best of Breed” (based on my experience) positions in private debt and preferred funds.  At this stage of my career, not losing money is the priority. If you find something good and relatively safe, stick with it.

5.       Focus on a Sector and Know it Well. For me, that will be multifamily. I understand it, and it is generally less volatile than other sectors of CRE. Passive income is not entirely passive; an investor must still perform due diligence upfront. The better a private investor understands a sector, they better decisions that will be made. Sponsor selection is paramount, but knowing how to evaluate specific deals is critical as well.

6.       Roth Conversions. I am on a multiyear program to convert traditional to Roth. Investors must have a firm handle on their tax brackets and related strategy. Imagine never having to pay tax on investment income.

So that is the focus of my conservative mind. If I were 20 years younger, I would certainly be more aggressive across the spectrum of risk that exists within CRE, for example, development deals involving apartments or housing.

One last note on crowdfunding platforms – I am still a bear despite testing multiple platforms. I have not yet found a silver bullet. I am still hopeful of Equity Multiple, a bear on Crowdstreet. Hopeful on Groundfloor, as they are doing a lot of interesting things. A bear on Upright (formerly FundthatFlip), just an horrible experience to date and will be exiting in 2025.

Happy private market investing. The tide will likely turn in favor of private markets in 2025 and 2026.