There are many mixed messages in the CRE markets. However, BGO Chief Economist Ryan Severino says that much of the data indicates better times ahead.
So far this year, CRE “continues to show measured, yet notable improvement,” he wrote in a post. Fundamentals are doing well; weaknesses tend to be an issue of increased supply and not falling demand. Federal Reserve cuts to interest rates are helping to improve CRE capital markets. Severino expects CRE to be in better shape at the end of 2024 than at its onset. This should help the market improve further in 2025.
Industrial still has some excess supply, but that is “inching closer to its end.” During the third quarter, the national vacancy rate was up 10 basis points to 6.6%. National rent growth has been slowing. Severino says expect the vacancy rate to continue through 2025 and rent growth to keep slowing. In the longer term, supply pipelines should ease, demand remand firm.
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Multifamily is experiencing a similar readjustment. Supply had outpaced demand in many metros, especially in the Sun Belt. The vacancy rate was unchanged at 7.9% — the highest level that CoStar has tracked since 2000. Asking rent growth is negative again. National vacancies should stabilize, increasing as the market strengthens. Over the longer term, the balance between supply and demand should improve, though gradually.
Retail is improving long-term with an unchanged national vacancy rate of 4.1%. That’s been flat since 2022 Q4. Asking rent-growth is slowing. Things should remain stable through the fourth quarter of 2024. Yearly asking rent growth is slowing after seeing big boosts in 2022 and 2023. One problem for the sector is the lack of good quality spaces. Supply and demand should be in balance in the short and longer terms. But this depends on the continued consumer activity.
That leaves the mystery that is office with a national vacancy rate of 13.8% and slowing asking rents. There is too much obsolete inventory dragging performance down; newer properties are doing well. The national vacancy rate should increase over the next year and rent growth will slow. Over the longer term, obsolete inventory will be demolished or converted to something more useful. It will take years, but could eventually come back, similarly to where retail once was and how it is now.
Capital markets have seen sectors other than office push further into positive territory for returns. Total returns should increase if the Federal Reserve keeps cutting and getting the federal funds rate toward the neutral or R-star interest rate. Credit markets are also picking up. Lower interest rates helped, particularly with the 10-year Treasury falling below 4%. However, that has reversed. Overall delinquency rates have increased. Debt origination should expand through 2025. Loan performance could further deteriorate. However, in the long run, there should be significant improvement.
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