December 20th, 2024
The market got its almost universally expected 25 bp rate cut from the Fed this week and the markets reacted negatively as language in the announcement signaled that there could be as few as two 25bp rate cuts in all of 2025. Its no secret at this point that rates and inflation remain a headwind and we're ending the week with the 10-year UST sitting just over 4.5%, which is the highest we've seen since May. Powell stated, “We coupled this decision today with the extent and timing language in the postmeeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments,”
The headwinds surrounding interest rates appear to be overshadowed by the narrative that fundamentals remain strong across most asset classes and investors are looking to come back into the market and transact. This could lead to a greater balance in the bid ask from buyers and sellers, which has been prohibitive in getting deals across the finish line over the past 12-18 months. Miriam Wheeler, a managing director in the global real estate finance group at Goldman Sachs mentioned this week that they estimate there is around $200B of dry powder on the sidelines in closed-end funds that needs to be deployed and this combined with asset values 10-40% below their peaks should lead to increased activity in 2025.
CMBS volume is up 180% YOY with 2023 being one of the lowest issuance years since 2010. This liquidity combined with an increase in capital coming into the market from insurance companies and private credit is important and the market is benefiting as large banks are increasing their lending volumes with more capacity to redeploy capital from loan payoffs. Concerns surrounding large bank failures appear to have subsided, though community and regional banks will still have to manage their exposures to CRE.
The effect of the new administrations fiscal policies remain uncertain as its possible that any personal and corporate tax benefits could be offset by tariffs and new immigration policies are likely to be inflationary. CBRE noted several positive developments in the CRE space heading into 2025 with expectations that we will see a topping out of vacancy in the office market and rising occupancy and rents in the multifamily sector even with new supply coming online. They anticipate that capital markets activity will increase by up to 10% in the coming year with moderate compression in cap rates.
David Steinbach, global chief investment officer at Hines stated in their 2025 Global Market Outlook that "now is the time for investors to put capital to work and reposition their portfolios" as he believes we are in the midst of a large transition in the investment landscape and ends the year very optimistic for the year ahead.
A high level summary across asset classes:
Housing: There’s a growing demand for rental housing due to a shortage of homes and rising mortgage rates. This has led to an increasing preference for renting, especially in developed markets, where there’s an estimated shortage of 6.5 million housing units.
Retail: The retail sector is experiencing growth after years of transformation. It has led in returns among major property types in the U.S. for the past eight quarters. The strong consumer sentiment and rising wages are particularly benefiting open-air, grocery-anchored retail spaces.
Industrial: While there’s been some slowdown, the industrial sector remains strong due to growth in net operating income (NOI) and stabilization of supply and demand. The pandemic boosted this sector, especially with the rise of e-commerce, supply chain changes, and industrial policy.
Office/Debt and Alternatives: The return-to-office trend and emerging opportunities in niche markets like student housing and digital infrastructure are creating positive investment prospects. Overall, market fundamentals are stabilizing, with some improvement in net absorption in U.S. markets for the first time in a couple of years.
We will be watching the Fed and macro conditions that influence Fed policy intently.
NOTE: HUD has issued draft program changes reducing DSCR to 1.15x and increasing the LTV to 87% for market rate refinances (80% for cash out). With a 35 year fixed-term and a 35 year amortization, HUD is a great tool for multifamily refinances that are proceeds sensitive.
