The economy hummed along in Q4 2024 as shoppers rushed home with their treasures. Following a .5% interest rate cut by The Federal Reserve (The Fed) in Q3, an additional .5% reduction in Q4 helped Commercial Real Estate (CRE) markets continue to flicker to life. Transactions in 2024 just surpassed those from 2023. Despite home sales growth not meeting last quarter’s forecasts, an unanticipated bump in inventory brought some twinkle to the residential market. All eyes are on the incoming Trump administration, with the hope it will brighten real estate prospects further.
Residential Real Estate
The market’s 2024 end was not as glistening as forecasted, due to rebounding mortgage rates. The 30-year fixed rate, which slid close to 6% in September, climbed back up to 6.85% by year end in response to inflationary concerns for 2025. While both existing and new home sales were elevated compared to the third quarter this time last year, they were below projections just done in August. However, as the National Association of REALTORS® economist Lawrence Yun recently pointed out, "Home sales momentum is building. More buyers have entered the market as the economy continues to add jobs, housing inventory grows compared to a year ago, and consumers get used to a new normal of mortgage rates between 6% and 7%." Indeed, latent demand was revealed when lower rates shook loose some locked-in homeowners. Realtor.com reported that newly listed homes rose in December for the month. But annual home price growth remained moderate at just 4.5% in October, according to the FHFA Index. Single Family Home Starts and Home Builder Sentiment1 were steadfast in Q4.
Commercial Real Estate
The CRE market continued to improve in Q4 2024. According to CoStar, 12-month sales volume was $237B for the four major asset types and will be higher once the end-of-year rush deals are recorded, just exceeding 2023 volume. Industry sentiment improved dramatically since The Fed started its rate reduction cycle and the election of a “business-friendly” president. The property price turnaround was solidified in November with the fourth consecutive monthly rise, according to CoStar’s CCRSI. Office continued to be the only worsening sector in the Mortgage Bankers Association’s delinquency measurement. Although distressed property sales saw a jump in November, they were minimal at 4.1%. Instead, early birds were driving transactions, demonstrating that some players learned from history. JLL research shows a first mover advantage in returns for those that leapt on opportunities following the 2008 Global Financial Crisis.
Multifamily is on the back side of a swell of construction that dampened rental rate growth. Per Avison Young, absorption increased in every market; lofty mortgage rates kept renters in place. Consequently, Multifamily deal activity was up 4.9% year-over-year, according to CoStar data. The in-person retail experience returned as a merry part of holiday shopping. With only backfill space available, annual rental rates for some sectors are as high as 3.4%. New, higher quality office space drew demand, but was in shorter supply. Office availability rates declined and the growing return-to-office movement supported transaction volume that ticked up each quarter in 2024. Industrial property transactions took a much-needed breather, with 2023 and 2024 volume almost even. As deliveries drifted down, Industrial’s rental growth settled back to earth but was still attractive at 3% in Q3.
A Glance Forward
President-elect Trump will bring some significant changes for economic policy. The most notable are an expansion of tariffs, both broader and higher; an extension of the 2017 tax cuts; and plans to address various foreign immigration matters. Until further details are cemented, these are potential boosting and dampening forces for real estate.
The residential market may suffer in the short term. The 10-year treasury yield2 seesawed up over 80 basis points this quarter; a market signal that Trump’s tax cuts and tariffs will extend inflation. The Fed projections for the number of rate cuts in 2025 decreased from four to two.
Tariffs, particularly on Canadian lumber, and a reduction of immigrant workers (which accounted for 25.5% of construction employees in 20233) could subdue housing starts and raise housing prices. If Fannie Mae and Freddie Mac are re-privatized, the President of the MBA recently pushed for clarity around the continued backing by the U.S. government, as it is vital to the stability of mortgage financing.
Longer-term impacts on housing availability may be more positive. Trump has floated some counterweighting policies, including less regulation, opportunity zones for housing and freeing federal land for market rate development.
In regards to CRE, Trump has touted favorable approaches toward corporate taxes, environmental regulation, interest carry forward and 1031 exchanges, which could give a push to CRE’s overall emerging rebound. But, the revised path of The Fed’s interest rates cuts will draw out the recovery.
Each CRE asset class faces different dynamics. In Multifamily, fewer immigrants could soften demand but removal of federal rent control may prop up property valuations. Tariffs on consumer goods could hit retailers hard and quickly, but CRE investors may benefit from accelerating merger and transaction activity. For Industrial, the onshoring trend will pick up and dramatically so, if near-shoring is no longer as attractive in Canada and Mexico. The disbursement of funds for CHiPs and IRA programs could become sluggish, but they are very popular on both sides of the aisle. The proposed new government efficiency commission has been clear that all federal workers be in the office full-time. The U.S. government is a very large landlord and, according to Bisnow, solidification of this policy could foster transactions in many major cities.
While the outlook for early 2025 is muddled, the new year’s mood is one of glimmering resiliency.
1NAHB/Wells Fargo Housing Market Index (HMI) | NAHB. National Association of Homebuilders, January 6, 2025.
2Board 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, January 3, 2025.
3Immigrant Share in Construction Sets New Record. Eye on Housing, National Association of Homebuilders, November 20, 2024.