Nashville, Tennessee, fended off challenges from Phoenix and Las Vegas to rank highest in the United States in terms of appeal to real estate investors in a new report that also showed investment desirability fell in several Florida markets.

The Music City is also the first market to be No. 1 for three straight years in the annual “Emerging Trends in Real Estate” study that consulting firm PwC produces for nonprofit real estate research and policy organization Urban Land Institute.

ULI’s report for 2024 is based on surveys and direct interviews with roughly 1,800 real estate professionals about the markets they consider the best overall for investment in the coming year. It provides a snapshot of an industry coping with higher interest rates and demand patterns that were changed by the pandemic.

The Sun Belt held onto its desirability in the survey as respondents haven't changed much of their outlook in the past two years, according to the report. Even so, despite staying at the top spot, Nashville's name is only mentioned eight times in the 141-page report, less than half the amount as last year.

Investor demand, while high in cities such as Nashville and Austin, Texas, appears tempered by some negative side effects of growth. These cities are dealing with lack of high-quality infrastructure and higher living costs, which may hurt future growth prospects, according to the report. Dallas, Atlanta and The Texas capital city of Austin all remained in the top five slots of the ranking.

But "these are still some of the fastest-growing and strongest economies in the nation, and little on the horizon seems likely to change that," according to the report.

Some Western markets are growing in popularity. Phoenix jumped seven places to the second overall position, and Las Vegas made its way into the top 20 for the first time. The rise in appeal occurred despite climate risks from living there after record-breaking heat waves descended upon these areas this summer.

Some of the biggest cities with the most educated workforces again aren't high on lists for investors. Elevated costs for buildings have cut investor appeal in areas including San Francisco, New York City, Boston and Washington, D.C.

In Florida, Miami descended from No. 7 to No. 14, Orlando dropped from 13 to 19, and Tampa-St. Petersburg sank from fifth place to 18th.

Overall, six of the 10 Florida markets in the rankings fell.

"Insurance woes seem to be at least one factor turning industry participants away from Florida markets," according to the report.

The report noted the future of the nation’s real estate is more clear than it was a year ago as the worst of the pandemic is over. However, industry professionals aren’t happy with what they're seeing: higher interest rates, less office demand and property value losses.

Interest rates and cost of capital are the biggest concern, according to the report. While debt may be slightly more available than last year, the report noted respondents think debt and equity underwriting will become more rigorous in the months ahead.

The report said most commercial real estate sectors are remaining resilient except for one: office. The decline in demand for office space will have "profound" consequences for the real estate industry and for downtowns in general, according to the report.

"After three years of holding out hope, industry leaders have finally concluded that most of us really won’t be returning to the office nearly as often, and some not at all," the report said.

Still, respondents to ULI's report say that, sooner or later, investment transaction volume will tick up. More deals may not be triggered by lowering interest rates, but instead may occur as people get used to higher rates. Indeed, more distress in the market may result in more deals getting done, according to the report.

Every city, though, is dealing with a major decline in demand for office space similar to what the nation saw with retail real estate in recent years, according to the report. Some office real estate is doing well, and the sector shouldn't be painted with a broad stroke, but a significant share of the sector's existing inventory will need to be repurposed or demolished, the report indicated.

Offices used to be the place where workers needed to go to do business including accessing phones and copy machines. However, most of that equipment has been replaced with portable devices that can be set up anywhere with an internet connection, the report said. That has resulted in less demand for space.

“Unlike an apartment, where at some point you can lower the rent enough to rent it up, sometimes there is no rent in which you can lease an obsolete office building,” according to one industry adviser quoted in the report.

Much of the office leasing is happening in the best spaces nationally while others are seeing vacancy grow. The less-than-desirable offices likely need to be converted into other uses, but it's difficult to change them into things such as housing, according to report.

Looking ahead, though, the report noted investors can't say office space is dead. New technology, such as artificial intelligence, may drive demand for office space. But AI could be a double-edged sword in reducing demand for office-based jobs.

Overall, firms that reduce their footprint save money on rent costs and their workers may be happier not commuting. In addition, these firms can recruit globally for remote workers who may have lower wage requirements, according to the report.

"The economics are just too compelling for firms to reverse course and lease office space like before," the report said.