Limon Net Lease Group

Research Brief

The Forces Driving Long-Term Rental Housing Demand

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Demographic Trends and Housing Costs Sustain Rental Demand​

Millennials Are Reshaping Rental Housing Demand​

  • There are 73 million millennials, now in their late 20s to early 40s, that are coming into key life stages like marriage and family formation​
  • Apartment lease renewal rates have climbed to 55% as fewer renters move into homeownership​
  • Enhanced amenities, modern designs, and better services have made rental housing more attractive​

Affordability Challenges Are Reshaping Housing Decisions​

  • Home prices have surged, rising 6.1% in the past year and nearly 50% since early 2020​
  • The monthly cost of owning a median-priced home is about $3,100, compared to $1,830 for an apartment​
  • The median first-time homebuyer age has risen from 30 in 2010 to 38 in 2024​

Limited Housing Supply Keeps Pressure on Rentals​

  • New single-family home construction remains low, keeping home prices elevated​
  • Mortgage rates show no signs of significant declines, reinforcing the affordability gap​
  • With fewer homes being built, rental vacancy rates could tighten, supporting rent growth​

As of 2024
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, National Association of Realtors​

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High-Speed Cycles Require Long-Term Thinking

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Beyond Market Volatility: ​Demographics Drive Long-Term Medical Office Growth​​

Rapidly Changing Economic Conditions Challenge Investors​

  • Market data is becoming outdated faster than usual, making it harder to rely on traditional indicators​
  • The latest economic forecasts for 2025 are already shifting, with major firms revising their projections.​
  • Inflation data lags real-time changes, missing key cost increases like the 30% rise in steel prices​

Aging Population Is Driving Medical Office Demand​

  • 11,000 people turn 65 every day, leading to a surge in healthcare service usage​
  • Seniors visit the doctor 7.1 times per year on average, nearly double the rate of younger adults​

Medical Office Construction Is Slowing Amid Growing Demand​

  • Only 8 million square feet of new medical office space was built in 2024, down from 14 million in 2023​
  • Construction starts have declined sharply; rising labor and material costs could limit new development further​

​From 1Q 2025 through 4Q 2029​
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, Moody’s Analytics ​

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Economic Uncertainty to Favor Commercial Real Estate

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Trade Policy Shifts and Economic Uncertainty​

The United States has escalated its Tariff Policies​

  • Mexico, China, and Canada are the U.S.’s three biggest trade partners accounting for 41.5% of goods imports in 2024​
  • U.S. President Donald Trump’s new 25% tariffs on imports from Mexico and Canada took effect on March 2, 2025​
  • President Trump also issued a new Executive Order on March 3, 2025, to increase the 10% tariff on all imports from China to 20% on March 4, 2025​

The United States faces economic risks​

  • The Atlanta Federal Reserve Bank has updated its GDP forecast for Q1 2025 from a -1.5% contraction to a -2.8% contraction, but noted that this is a modeled estimate ​
  • The implementation of tariffs pose could slow economic growth and increase inflationary pressure​

The Economic Policy Uncertainty Index has risen to its second highest level in history, but does create some…​

  • Heightened uncertainty creates a variety of challenges, including indecisiveness from businesses and volatility in the financial market​
  • As uncertainty rises, investors may continue reallocating capital toward hard assets such as real estate, seeking stability​

​Sources: Marcus & Millichap Research Services, U.S. Census Bureau ​

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Is Economy Slowing?

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Navigating Economic Uncertainty: Breaking Down the Data​​

Economic Growth Outlook Faces Headwinds​

  • The Atlanta Federal Reserve Bank GDP forecast for Q1 2025 predicts a -1.5% contraction, triggering concerns​
  • Businesses stockpiled goods ahead of potential tariffs, which is weighing on economic growth​
  • Despite the negative Q1 outlook, economic growth could rebound in Q2, potentially reaching 4%, as trade normalizes​

Uncertainty Surges to Its Highest Level Since the Pandemic​

  • Economic uncertainty has spiked, reflecting concerns over negative GDP growth, government downsizing, and Federal policy shifts.​
  • Driven by political divide, consumer sentiment fell sharply from 71.1 to 64.7 in February, its lowest reading since November 2023​

Consumers and Businesses Adjust to Policy Shifts​

  • Consumers are spending less and saving more, with the savings rate rising from 3.5% in December to 4.6% in January​
  • Retailers and manufacturers rushed to import goods before tariffs take effect, distorting economic data for early 2025​

*Through February 2025​
The Economic Policy Uncertainty Index is a measure of policy-related economic uncertainty, derived from the ​frequency of news articles discussing economic policy uncertainty in leading U.S. newspapers. Higher values indicate greater uncertainty​ Sources: Marcus & Millichap Research Services, , Scott R. Baker, Nicholas Bloom, and Steven J. Davis.​

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Has Office Space Demand Turned the Corner

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Office Market Recuperating: Early Signs of a Recovery ​

Office Market Shows Signs of Recovery​

  • The national office vacancy rate declined from a record high 17.1% in 1Q 2024 to 16.7% in 4Q 2024​
  • Office demand began to recover, with net absorption turning positive in 2Q 2024​
  • Hybrid and work-from-home policies still present a challenge to the sector, but many high-profile companies are instituting return to office mandates​

Recovery Varies by Market and Property Class​

  • The vacancy rate among primary market CBDs fell by 50 basis points since 1Q 2024, while the vacancy rate among secondary suburbs had only fell by 10 basis points​
  • The class A vacancy rate dropped by 60 basis points, while class B/C rates fell by 30 basis points​
  • Six metros — West Palm Beach, New Haven, Miami, Charleston, Las Vegas, and the Inland Empire — reported lower vacancy rates in 2024 than they did in 2019​

Shifting Office Market Creates New Investment Dynamics​

  • Office cap rates have risen by 120 basis points since 2022, offering higher yields but likely greater risks​
  • The combination of higher yields and recovering property performance may offer investors more opportunities in 2025​

Sources: Marcus & Millichap Research Services, CoStar Group, Inc. ​

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As Uncertainty Rises, Stability of CRE Stands Out

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Uncertainty on the Rise: A Potential Long-Term Tailwind for CRE?​

Elevated Uncertainty Is Affecting Investment Strategies

  • The U.S. Uncertainty Index has more than doubled since October, reaching levels parallel to the Global Financial Crisis
  • Increased executive actions, tariffs and policy shifts are contributing to an unpredictable environment for investors
  • Investors could stall decision-making as they wait for greater clarity, which could delay commercial real
  • High estate trading activity

Market Volatility Highlights CRE’s Stability For Investors

  •  uncertainty often drives volatility in the stock market, making more stable investment alternatives like real estate more attractive
  • Over the last couple of years, commercial real estate asset pricing has adjusted to align with higher debt costs
  • Limited new construction in key commercial real estate sectors also support the outlook for long-term property value growth

Strong Fundamentals Support The U.S. CRE Outlook

  • GDP growth is healthy, job creation continues, and unemployment is low — signaling that the economy remains on solid footing
  • Apartment net absorption hit record levels in late 2024, office demand is rebounding, and new retail supply additions remain constrained
  • New policy changes regarding tariffs and immigration could limit new supply even further by increasing construction costs, supporting long-term commercial real estate asset performance

*Through January 2025
Sources: Marcus & Millichap Research Services, Scott R. Baker, Nicholas Bloom, and Steven J. Davis.

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