MARKET OVERVIEW
The fourth quarter of 2024 marked a return to positive and broad Commercial Real Estate (CRE) deal growth after two years of declines. Federal Reserve rate reductions and a "developer in chief" as president-elect helped bolster December transactions to their highest for that month in three years.
This activity may have energized price discovery and sector differentiation. December prices ticked down after four months of gains. Cap rates for Office and Retail rose slightly since Q3, while high quality Multifamily assets experienced compression, CoStar data showed. Distress deals were insignificant, although delinquencies crept up for all but Industrial in Q4.
Uncertainty has tempered transaction activity so far this quarter, fueled by a jump in treasury yields1, the legality and volume of executive orders from the White House, an unwelcomed blip in January inflation, fluctuating tariff policies and the market-altering aftermath of fires in Los Angeles. Despite a bumpy start to a new CRE cycle, Bisnow reports anticipated price discovery momentum and continued engagement by banks. The Mortgage Bankers Association expects 2025 originations to expand by 16%. “Given the strong pickup in origination activity at the end of 2024, it appears that at least some borrowers and lenders are ready to move.”
So far, declining deliveries have boosted the fundamentals in all major sectors, per CoStar. In Retail, 2024 net deliveries2 were vastly below their 10-year average, holding vacancy2 at 4.1% in January. JLL believes that the hits Industrial took to vacancy and rents from its surge in space are near the end. In Q4, Office saw vacancy2 stabilize at 13.8%, the pace of downsizing decline and net absorption go positive for the first time in three years. However, there is a lot of transition left for the Office sector. The federal government’s aggressive return-to-work policy will lead to rightsizing in many markets. The pace of Multifamily deliveries2 is expected to ease further in 2025. And with current mortgage rates at their highest in over six months, the rent vs. buy decision strongly favors renting. Consequently, Fannie Mae foresees rental growth doubling this year.
A DEEPER DIVE: HIGH QUALITY, LARGE MULTIFAMILY DEVELOPMENTS
According to CoStar, Multifamily transactions leapt almost 22% in 2024, making it investors’ target asset class for this year. Four- and five-star properties with 50 units or more are particularly in demand. The graph below shows which regions were ahead of the declining deliveries curve but had keen investor activity – making them worthy of attention early in 2025.
This is the case in the Southeast, particularly the central Florida and Atlanta markets, which experienced both a steep growth in sales and the sharpest drop in deliveries over 2024. FOMO (Fear Of Missing Out) might drive very energetic activity here. On the other hand, besides Chicago, many of the markets in the Midwest region had neither transaction momentum nor much change in inventory. Investors are expected to be selective and let price discovery play out in these markets. The Northeast, West, Southwest and Mid-Atlantic regions all either saw sizeable declines in inventory – or enjoyed the uplift in transactions over the year. These regions may enjoy healthy activity in Q1, but not at a frantic pace.
WHAT’S NEXT?
Stay tuned for next month’s Economic Update Q1 2025 to see how the commercial real estate market finishes the first quarter of 2025 and where it could be headed next.
1 Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, February 26, 2025.
2 Copyright ©2025 “January 2025 Commercial Real Estate Insights.” NATIONAL ASSOCIATION OF REALTORS®. All rights reserved. Reprinted with permission. https://www.nar.realtor/commercial-real-estate-market-insights/january-2025-commercial-real-estate-market-insights