Financial services giant PwC, however, said in a report on Wednesday it’s “optimistic” about where commercial real estate is headed in 2024 and believes “the worst of inflation is behind us,” which will lead the Federal Reserve to pause or reverse its interest rate hikes. The Fed on Wednesday largely confirmed that plan by extending its four-month pause on interest rate hikes and signaling three quarter-point cuts to its benchmark interest rate next year.

With lower interest rates, PwC forecasts that there will be more commercial mortgage-backed securities (CMBS) available and increased investor appetite for acquiring new properties—particularly in affordable housing, digital infrastructure (think data centers), and other residential properties. 

Reopening of real estate debt market

PwC said it is “optimistic as we see significant opportunities for patient and creative market participants across the investment landscape who are willing to take the long view.” 

Lower interest rates could lead to a thawing in the real estate debt market, Tim Bodner, global real estate deals leader at PwC, tells Fortune. Because of plunging commercial real estate values, particularly for office buildings, and rising default rates, lenders have been reluctant to issue loans to buyers. 

“This dynamic has changed as the interest rate outlook is much more favorable,” he said. 

In fact, PwC has already seen increased mortgage-backed securities for commercial real estate in the past 30 days after they had declined for most of the year, Bodner added.

Since the pandemic started, commercial real estate has reeled. Because of empty offices and plummeting building prices, many owners have defaulted on their loans. In perhaps the highest-profile implosion, WeWork filed for bankruptcy and shed dozens of leases in New York City alone. Nationwide, downtown office vacancy rates have soared to 17.3%, up from 10% before the pandemic, according to PwC. The vacancy rate for suburban office space is 16%, an increase from 12%.

After more than a year of predictions of a recession, many economists now forecast a “soft landing” for the U.S. economy that will translate into a period of slower economic growth, moderate job growth, and higher interest rates. For that reason, PwC’s survey of real estate industry leaders shows that about 40% of respondents believe investment returns—or the resale value—will stay at current levels in 2024. But almost 70% say they expect returns to be lower during the next five years. The survey is based on interviews with 600 people and 1,260 responses.

“Because of the higher interest rate environment and transitioning interest rate environment, the absolute level of returns will simply be lower,” Bodner says.

Private investment in affordable housing 

Investors have long put money into affordable housing projects, mostly as a strategy to get tax breaks. A March study by the New York Fed found that most private investment managers in multifamily affordable housing anticipate raising more investment funds in the next one to two years than they did in a roughly five-year period ending in August 2022. Case study data also showed plans to more than quintuple investments in new construction projects during the next one to two years.

“Housing supply across the world is a societal imperative,” Bodner says. “Investors are cognizant of this and are seeking to play their role by doing what they can to increase housing supply, not only with respect to new projects but also existing.”

Naysayers of private investment in affordable housing have said, though, that this type of investment strategy has actually taken homes away from the people who need low rents the most. In early 2022, Sen. Elizabeth Warren (D-Mass.) accused private equity firms of “taking advantage of the housing shortage by purchasing large numbers of houses and raising rents for families.” 

Either way, it’s “not a new investment strategy,” Bodner contests. “Many global investors have invested in affordable housing projects involving low-income housing tax credits as part of carve-outs from corporate enterprises, developed new assets, and invested in existing assets that have not involved tax credits.”