Capital Markets 2025 CRE Forecast
In a recent webinar hosted by Matthews Real Estate Investment Services’ Cliff Carnes, industry veterans David Treadwell and Andrew Marcus provided in-depth insights into capital markets, lending trends, and the current state of various property types. Here’s a breakdown of the key takeaways from the session.
Interest Rate Trends and Market Impacts
The capital markets have seen significant activity, particularly following the Federal Reserve’s decisions to lower short-term interest rates. In September, the Fed surprised many by cutting rates by 50bps instead of the anticipated 25bps, followed by another 25bps cut in November. As a result, the Prime rate dropped from 8.5% to 7.75%, marking a 75bps reduction. Similarly, the SOFR 30-day overnight rate followed suit, decreasing from roughly 5.35% to 4.65%.
While these reductions are positive for short-term lending, the broader market dynamics are more complex. The labor market showed signs of cooling, with only 12,000 jobs added last month, which had no immediate effect on the 10-year Treasury yield. Instead of declining, as might be expected, the 10-year Treasury yield rose by approximately 75bps, reaching 4.42%.
Theories for this paradoxical dynamic include persistent inflation concerns, market skepticism about the Fed’s measures, and a shift of capital from bonds to equities following the pro-business sentiment surrounding the recent election.
David Treadwell explained the disconnect, “the bond market is cautious, driven by lingering concerns over inflation and shifting capital into equities, which temporarily boosts yield.” He expects the 10-year Treasury to stabilize in the low-4% to high 3% range over the next 12 to 24 months, creating more favorable conditions for borrowers.
The Fed’s dual mandate to promote maximum employment and stable prices remains at the forefront of its monetary policy decisions. Recent data shows progress on inflation, with the CPI nearing the Fed’s 2% target at 2.6%. However, rising unemployment rates pose a concern, creating a delicate balance for policymakers.
With one remaining meeting in 2024 in mid-December, the market remains divided on whether the Fed will cut rates further, with odds currently split between 25bps and holding rates steady.
Andrew Marcus added, “the decision will hinge on upcoming economic indicators, including November’s CPI and jobs report, set to be released in early December. These data points will likely shape the Fed’s next steps in navigating the balance between controlling inflation and fostering employment stability.”
Looking Forward: A 2025 CRE Forecast
The forward curve for interest rates indicates a potential decline in short-term rates, with many predicting rates to settle around the 3.5% range. While these adjustments may not directly impact Treasury yields, they typically influence short-term rates like SOFR and the Prime rate, which could provide relief for bridge lending and short-term financing. This is particularly beneficial for projects not yet ready for long-term fixed-rate loans, as floating interest rates become more attractive.
The high interest rate environment has stalled new construction, particularly in multifamily housing. However, as rates begin to ease, construction activity across property types is expected to pick up. This is critical as multifamily housing deliveries currently outpace permits, indicating a potential housing shortage by 2026 if construction does not accelerate. Transaction trends for 2024 show a challenging start but are not aligning with 2023 levels, signaling stabilization. Optimism grows for a stronger market in 2025, driven by rate normalization and increased construction activity.
David added that “2024 began sluggishly, largely due to unrealized expectations for rate cuts. As of the end of 2023, forecasts suggested six rate cuts throughout 2024, but only two materialized.”
Sector-by-Sector Analysis
The Commercial Property Price Index (CPPI) provides a revealing snapshot of sector performance, highlighting a significant downturn in the office market, particularly in Central Business District (CBD) office properties, which have declined more steeply than their suburban counterparts. Retail and multifamily properties have also seen declines, though less pronounced, while industrial assets have defied expectations by demonstrating consistent growth. This resilience is largely driven by the ongoing expansion of e-commerce, as evidenced by the increasing demand for warehouse and distribution spaces to support daily deliveries from giants like Amazon.
David Treadwell focuses on multifamily housing and points out that “the sector has faced seven consecutive quarters of declining transaction volume and pricing, closely tied to recent interest rate hikes. However, the trend appears to be stabilizing as we progress through 2024.”
Diving into Denver’s trends, he notes that “vacancy rates in Denver have fallen 27 basis points from Q2 to Q3, reaching 5.28%, a positive indicator of sustained occupancy and longer tenant retention. Additionally, absorption rates in Denver have hit their highest levels since 2021, with over 5,286 units absorbed in Q3 alone, reflecting strong demand.”
David Treadwell also provides an update on senior housing, stating that “the sector has faced significant challenges in recent years, particularly in the aftermath of COVID-19, which disrupted the sector and spooked many lenders.” Underwriting criteria for senior housing have become more stringent, making financing more complex. However, the need for senior housing remains strong, and operators have adapted by streamlining operations and improving efficiency to navigate the difficult landscape. As a result, some lenders are cautiously re-entering the space, recognizing its long-term demand and potential. While recovery in the sector may be gradual, the essential nature of senior housing ensures it will remain a vital and in-demand asset class, poised for eventual growth as market conditions stabilize and investor confidence returns.
Andrew Marcus analyzes the pricing trends for retail. He reveals that over the past three years, “retail asset pricing has closely mirrored multifamily trends, albeit with less dramatic fluctuations, and recent data indicates a return to positive growth as of the present day.”
In contrast, self-storage assets experienced a surge in growth between 2021 and 2023, driven by pandemic-related housing market activity and migration patterns. However, the sector has been negatively impacted over the past year by rising interest rates, which have slowed the housing market and reduced demand for self-storage needs. Nonetheless, the sector could rebound if economic conditions improve and interest rates stabilize.
Meanwhile, Andrew Marcus points to “industrial assets continuing to improve, leading the market with robust and consistent growth over the last decade. Industrial real estate is expected to remain a highly sought-after investment within the commercial real estate landscape.”
Andrew Marcus highlights that another attractive asset class for lenders is medical office and medtail properties. “The earlier concerns about the impact of e-commerce on brick-and-mortar retail have largely subsided, as the market has found a balance where physical locations complement online operations.” He continues that “medical properties are particularly appealing to lenders due to their ‘sticky’ tenancy. The high build-out and investment costs for medical practices result in long-term leases and reduced tenant turnover. This stability, combined with the essential nature of medical services, makes the sector a reliable and favored choice for investment.”
2025 CRE Forecast for Lending
The Mortgage Bankers Association (MBA) is forecasting a significant increase in commercial real estate lending activity in 2025 and 2026, approaching the high levels seen in 2022, which was a record year. This optimistic outlook signals an ideal opportunity for those considering refinancing or acquisitions, as lenders are gearing up to deploy capital and take on new deals.
Both Andrew Marcus and David Treadwell share similar sentiment on the market and highlight that timing the market is an impossible task, as no one has a crystal ball. The key takeaway for investors is that if a deal works and the numbers pencil, it’s better to act than to wait for potentially more favorable conditions. Positive leverage should be the deciding factor, as waiting could mean losing the deal to someone else. While the market has faced challenges with rising rates, there is plenty of capital available from sources like life insurance companies, bridge lenders, and agencies such as Fannie Mae and Freddie Mac, which collectively allocated $140 billion in 2024.
This robust capital supply is expected to persist into 2025, with additional opportunities emerging in short-term, long-term, and even construction financing. After navigating the difficulties of recent years, the outlook for 2025 CRE is far more optimistic.
