The economic landscape has shifted significantly and as a result, the commercial real estate industry is poised for a turnaround in 2025 after two years of challenges and headwinds. Several indicators point to fair pricing of CRE assets and increased investor interest, which means a period of pronounced gridlock could be behind us.
According to Cushman & Wakefield global chief economist Kevin Thorpe, Fed rate cuts, the 10-year Treasury yield in the 4% range, and a flattening yield curve that is on track to uninvent this year are among the trends injecting optimism and confidence into the CRE market. In addition, lenders are re-engaging with the market, which is bringing down the cost of debt, and transactions are on the upswing as sellers are gradually capitulating and dry powder is coming off the sidelines, the report said.
Property values are generally fairly priced after two years of correction, said Thorpe. The national CPPI index peaked in mid-2022 and is down 12% since then, which brings it back in line with pre-pandemic growth trends.
Central business district office pricing has experienced the largest correction, with values dropping by half on the impact of hybrid work. Investors have been drawn back into the market at current prices, and sales volumes of CBD offices grew 28% year over year during the first three quarters of 2024.
As of December 2024, unlevered expected returns are hovering around 7.5%, compared to corporate bond yields which are hovering in the mid- to high-5% range. This indicates yields that are attractive for investors. In addition, spreads between cap rates and treasuries are normalizing in most sectors, which signals that properties are fairly valued.
With pricing corrections bringing valuations back into balance, a meaningful uptick in transaction activity is likely, said the report. After dropping 50% year over year in 2023, CRE transaction volumes have stabilized in 2024 and are beginning to trend higher heading into 2025, said Thorpe. Transaction-based property values have also largely stabilized and are starting to tick higher, as of the third quarter.
“Market conditions are increasingly favorable for both equity and debt,” Thorpe wrote. “The substantial pool of dry powder remains intact, the denominator effect has reversed, suggesting that investors are largely underweighted on property, and debt costs are coming down.”
Meanwhile, the incoming Trump administration has signaled it intends to make sweeping policy changes. However, the report noted that Trump has shown a willingness to shift his stance based on the reactions of investors and financial markets. After performing well under Trump’s first administration, the property sector appears likely to be able to navigate the policy changes ahead, said Thorpe.
By: Kristen Smithberg
Source: GlobeStreet
