Wednesday, December 18, 2024

Commercial real estate looks to stronger 2025 with Fed rate cuts underway

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Better times are ahead for the commercial real estate market with one sizable Federal Reserve interest rate cut down and multiple rate cuts likely to come in the next year, according to CBRE.

“If you were to look at the whole real estate market … we’re in the trough, and we’re looking forward to the upswing,” Richard Barkham, CBRE’s global chief economist, said in a call with reporters last week.

The Fed lowered its benchmark interest rate last week by 50 basis points, or half of a percentage point, after it raised the rate 11 times between early 2022 and last summer. The series of increases culminated with the key rate sitting in a range of 5.25% to 5.5%.

The Fed kept ratcheting up the interest rate as a lever to tame inflation.

Now that inflation has cooled and the job market has softened, the Fed is reversing course by lowering rates to address the other half of its mandate – to foster full employment.

The Fed doesn’t set the interest rates consumers are most familiar with, such as those for homes and cars. But the Fed’s actions do influence all other borrowing rates.

CBRE, the world’s largest commercial real estate services and investment firm, said it believes that the Fed will reduce the benchmark interest rate by another half point between two additional meetings this year, followed by another point and a half of rate cuts next year.

That would take the Fed’s benchmark interest rate from the roughly 5.38% we’ve seen for over a year to about 3.13% by the end of next year, if CBRE’s forecast is correct.

“This fall in rates of 50 basis points will be welcomed by the real estate community,” Barkham said.

Since at least the second quarter, they’ve been seeing the benefits of a so-called “soft landing” playing out in the real estate sector, he said.

And it’s been clear for a couple of months that interest rates were coming down, he said.

Additional expected rate cuts, coupled with lower bond yields, will bolster commercial real estate investment activity and asset values, according to CBRE.

The company forecasted a 5% increase in annual investment activity this year with further acceleration next year.

Their models are pointing to 15-20% more transactions, Barkham said.

Real estate investment in the coming year will be a “slow, normal … rise of the tide,” not a tidal wave of cash, he said.

National office leasing is steady relative to last year, Barkham said.

The national office market had a 19% vacancy rate, according to CBRE’s latest quarterly figures.

“But we’ve seen a notable pickup in leasing in Manhattan, and that often signals the start of a new real estate or office cycle,” he said.

Industrial leasing is strong, likely stronger than last year, he said.

There’s been notable activity from third-party logistics operators, according to Barkham.

“Industrial users have become cautiously, or perhaps less cautiously optimistic, for the consumer sector,” he said.

The retail sector is in “good health” but is being held back by a lack of available space, Barkham said.

Recent wage gains have outpaced inflation, with the National Retail Federation saying Americans “have the underpinnings to spend.”

Wages are up 3.8% in the last year, while both major measures of inflation are now 2.5% – down from the consumer price index’s June 2022 peak of 9.1%.

The market for data centers is in a “full-scale upswing” with “a lot of tailwinds behind it,” he said.

Hotels are in a mildly extended lull with increases in their operating costs coupled with budget-conscious Americans cutting back on vacation spending, Barkham said.

Apartment leasing is “extremely strong,” he said.

Apartment and industrial sectors still have a lot of new construction to absorb, Barkham said.

Zillow recently reported that more landlords are offering concessions to lure tenants with more apartments hitting the market.

Rental market supply and demand appear to be coming into better balance, as more multifamily units were completed in June than in any month in nearly 50 years, according to the Zillow report published last month.

Meanwhile, another Zillow report found that the nation’s housing deficit is deepening.

The housing shortage grew to 4.5 million homes in 2022, up from 4.3 million the year before, according to Zillow.

There were about 8.09 million “missing households” that year, Zillow said. Those are people, including families, living with nonrelatives.

At the same time, there were just 3.55 million housing units available for rent or for sale.

Families increased by 1.8 million, but only 1.4 million housing units were built, Zillow said.

Zillow said the housing deficit is the root cause of the housing affordability “crisis.”

Barkham noted that real estate is “always about local markets.”

Some areas are going to be ahead of others in the growth curve.

Despite slowing job growth, CBRE said it expects the economy will avoid a recession and the economy’s soft landing will lift occupier confidence.

That should provide resilient demand for space across all commercial property types, CBRE said.

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