The commercial real estate market is on track to reach a turning point in 2025 as a variety of positive factors converge, including gradually improving interest rates and a 10-year treasury yield that is coming back in.
Other factors pointing to positive momentum in the new year are steady job growth, two years of price corrections, commercial property value adjustments of between 20% and 30%, and a pullback in supply with lower construction starts, according to Marcus & Millichap CEO Hessam Nadji during an interview on Bloomberg News.
“What I’m seeing is a shift for the fear gauge to go from uncertainty to fear of missing out,” Nadji said.
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Obsolete office buildings continue to be the CRE industry’s biggest challenge, with only about 5% to 10% of inventory in this category suitable for multifamily conversion. Unlike obsolete retail that was devastated by e-commerce 10-15 years ago, obsolete office buildings are not as easily re-imagined or rebuilt, he said.
“But that is such a small fraction of commercial real estate,” said Nadji, pointing to momentum in the apartment market that is being driven by strong demand as homeownership remains out of reach for many. In addition, retail has made a big comeback, with many people saying demand for brick-and-mortar retail is the strongest it has been in two decades, especially for open air and community shopping centers, Nadji said.
The lending market is improving following pressure on banks over the past couple of years.
“There is financing available for quality sponsors making deals that make sense,” said Nadji, noting Marcus & Millichap did transactions with 390 separate lenders across the country during the past year. “Our finance team is constantly replacing lenders that pull out of the market with lenders that are coming back into the market. So it's a very fragmented process to find loans for our private clients. Larger institutional clients have lines of credit and other ways of accessing debt.”
Nadji also pointed to a favorable election outcome for the 2017 Jobs and Tax Reduction Act, which includes helpful provisions for commercial real estate. These provisions are more likely to be enacted under a Trump administration and that could be another catalyst for more capital coming into commercial real estate, he said.
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Kristen Smithberg
Kristen Smithberg is a Colorado-based freelance writer who covers commercial real estate, insurance, benefits and retirement topics for BenefitsPRO and other industry publications.
