Limon Net Lease Group

Research Brief

How the Election is Already Impacting CRE

by

Commercial Real Estate Outlook Shifts with Republican Trifecta ​

Election Results Signal Impactful Changes For The Economy ​

  • Republicans won control of the house, senate and presidency, suggesting significant policy changes may occur in the near future ​
  • Proposed policy changes for tax cuts, tariffs and immigration are likely to impact the economy and commercial real estate landscape ​
  • Pace, scale and impact of policy changes remain uncertain, creating both optimism and increased risk among investors ​

Interest Rate Outlook Shifts As Inflation Concerns Grow ​

  • The 10-year Treasury yield has risen by 70 basis points since October, due in part to expectations of increased inflation ​
  • The recent rise in the 10-year Treasury yield is putting upward pressure on the cost of commercial real estate financing ​
  • Proposed tariffs and immigration changes are projected to increase the national deficit, resulting in increased treasury issuance and a slower pace of rate cuts from the Federal Reserve ​

Real Estate Demand Drivers Strong Despite Policy Uncertainty​

  • Continued housing shortage and large gap between the cost of renting and buying support long-term outlook for apartments ​
  • Consumer strength underpinned by strong household balance sheets, with most having below-average debt and high levels of savings​

*Sources: Marcus & Millichap Research Services, CME Group​

​​Watch Video Below:

The Forces Driving Retail and Industrial CRE

by

Retail Sector Stays Tight, Industrial Adjusting to Supply Surge

Retail Market Exhibits Long-Term Stability ​

  • Retail property performance has undergone minimal changes since the pandemic, with overall vacancy holding steady and asking rent growth remaining positive, but slow ​
  • The 2024 U.S. retail pipeline is limited, minimizing future supply-side risk ​
  • Retail demand momentum is strongest across the sun belt; but several other metros — like Indianapolis, Salt Lake City and Northern New Jersey — are also exhibiting strong performance ​

Industrial Supply-Side Pressures Are Gradually Easing​

  • Record-level industrial construction has coincided with slowing demand over the last two years, lifting the national vacancy rate and flattening rent growth ​
  • The pace of construction is slowing, pairing with increased consumption and eCommerce sales to provide the runway for the industrial supply overhang to be absorbed over time ​
  • Development is concentrated across several metros, hinting at bifurcating performance metrics between heavily- and lightly-supplied markets ​

Construction Trends Are Key To Sector Performance​

  • Meager retail construction and the slowing pace of industrial development will underpin performance trends in each sector moving forward ​
  • Other variables, such as retail sales, interest rates, job creation, wage growth and consumer sentiment will also influence space demand from tenants

*Through 3Q​
Sources: Marcus & Millichap Research Services, CoStar Group, Inc. ​

​​Watch Video Below:

Has Commercial Real Estate Performance Turned the Corner?

by

Apartment and Office Sector Performance Defy Expectations

U.S. Multifamily Market Momentum Defies Expectations

  • U.S. multifamily vacancy fell in 3Q 2024, despite record completions
  • Apartment demand was robust in 3Q 2024, with net absorption reaching the strongest level since mid-2021
  • A persistent housing shortage and improved economic sentiment are sparking household formations and fueling rental demand

Regional Absorption Patterns Highlight Sunbelt and Key Metros

  • Sunbelt markets lead in multifamily net absorption, due in part to their high concentration of new unit deliveries
  • Vacancy compression is notable in markets with fewer completions and solid demand, like D.C., Portland, OR, and San Francisco
  • Multifamily demand expected to keep pace with construction in 2025, likely sustaining these regional trends and declining U.S. vacancy

Office Sector Exhibiting Gradual Rebound

  • U.S. office net absorption reached a near-2-year high in 3Q 2024, reducing the national vacancy rate
  • Minimal new construction should continue to support vacancy compression; however, fundamentals are moving slowly
  • Return-to-office policies becoming more prevalent, providing a potential tailwind, but office tenant demand appears bifurcated​

*Through 3Q ​
Sources: Marcus & Millichap Research Services, RealPage, Inc.​

​​Watch Video Below:

Will Elevated Debt Threaten the Economy

by

Consumer Strength Eases Household Debt Concerns for CRE ​

Household Debt Is Elevated, But Remains Manageable ​

  • Total household debt reached an all-time high as of 2Q 2024 ​
  • Over 70% of the debt is housing-related, placing less of a financial burden on most households, as much of that debt takes the form of low-interest rate mortgages and home equity lines of credit ​
  • Non-housing debt, including auto loans, student loans and credit card debt, is also at a high, impacting some households more than others ​

Job Growth And Wage Gains Are Sustaining Economic Growth ​

  • U.S. employment is at a record level, with over 2 million jobs added in the past year ​
  • Wage growth outpaced inflation over the past 12 months ​
  • Strong employment and wage growth are offsetting rising debt levels ​

Consumers Remain Healthy, Supporting CRE Space Demand ​

  • Household debt service payment levels are below historical norms ​
  • Financially-strong consumers are supporting demand for apartments and self-storage, as well as retail and industrial space ​
  • Healthy household balance sheets should also translate to optimism regarding leisure travel, strengthening demand for hotel rooms ​

*Through 2Q​
Sources: Marcus & Millichap Research Services, Federal Reserve​

​​Watch Video Below:

Why CRE Insurance Costs are Poised to Surge

by

Natural Disasters and Rising Insurance Costs: Impact on CRE

Natural Disasters Are Increasing In Frequency And Cost ​

  • Natural disasters with total damage costs exceeding $1 billion have steadily risen since the 1980s ​
  • The U.S. now averages almost 22 natural disasters per year, up from about 13 in the 2010s ​
  • Over 21 natural disasters with at least $1 billion in associated damages have already occurred in 2024 ​

Insurance Costs Have Surged Due To Increased Risk ​

  • Apartment insurance rates doubled from 2019 to 2024, with a peak growth pace of 35% from 2023 into early 2024 ​
  • High-risk states like Florida and California have seen outsized insurance rate hikes ​
  • Rate increases spread throughout the U.S. due to insurance providers’ risk diversification models​

Rising Costs And Risk Impact Investor Decision-Making ​

  • Insurance costs are 8-10% of total expenses, influencing underwriting ​
  • Rising rates affect migration, with some homeowners leaving high-risk states like Florida ​
  • CRE sectors like self-storage, industrial and retail could see shifts in space demand as people move ​

*Through 3Q ​
Sources: Marcus & Millichap Research Services, RealPage, Inc.​

​​Watch Video Below:

Will September Job Surge Put Rate Cuts on Hold

by

September’s Strong Jobs Report Alters the Economic Outlook​

Job Growth Stronger Than Expected in September ​

  • 254,000 jobs added in September, surpassing expectations​
  • Revisions added 72,000 more jobs to the July and August total ​
  • Unemployment rate ticked down to 4.1% ​
  • Wage growth hit a four-month high ​

Jobs Report Likely Impacts Federal Reserve Policy ​

  • The jobs report has weakened the case for a 50-basis-point interest rate cut in November ​
  • The Fed may now consider pausing rate cuts to assess economic conditions​
  • Overnight rate still expected to lower by 100bps by June 2025 ​

Commercial Real Estate Outlook Remains Positive ​

  • Job creation drives housing needs and consumption, the latter of which flows into space demand for retail and industrial properties ​
  • Continued job growth could aid office utilization over time​​

​Sources: Marcus & Millichap Research Services, BLS​

​​Watch Video Below: