Limon Net Lease Group

Research Brief

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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Will Tariffs Impact Commercial Real Estate?

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Navigating Tariffs: Economic Growth, Inflation and CRE Outlook ​

Tariff Announcements Introduce Economic Uncertainty ​

  • This past week, the U.S. announced significant tariff increases on Canada, Mexico and China ​
  • Canada and Mexico each negotiated 30-day delays, while China retaliated with tariffs on American goods ​
  • Potential trade wars with Canada, Mexico and China could impact economic growth and inflation in the U.S. ​

Economic Growth Under Pressure; Inflation Risks Heightened ​

  • Tariffs could slow U.S. GDP growth to 0.7% to 1.8% in 2025, down from the 2.2% forecast ​
  • Inflation could rise by 0.5%, pushing it back to the 3.5% range ​
  • Higher inflation could prevent the Federal Reserve from cutting interest rates ​

Commercial Real Estate Faces Indirect Headwinds ​

  • Industrial and retail sectors may see reduced space demand from tenants as consumer spending declines ​
  • Higher construction costs could slow multifamily housing development ​
  • Limited new housing supply may support rent growth, but it also increases the risk of regulatory actions such as rent controls ​

As of 2022​
Sources: Marcus & Millichap Research Services, The Observatory of Economic Complexity​

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Will CRE Investors Adapt to Higher Rates?

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Shifting Strategies: Adapting to “Higher-for-longer” Rates ​​

Federal Reserve Holds Steady, Eyes Future Policy Shifts ​

  • The Fed left the overnight rate unchanged at its January meeting and continues quantitative tightening ​
  • Chairman Powell signaled rates are currently restrictive enough, but also avoided committing to future rate cuts ​
  • Market expectations lean toward no rate cut in March, with higher odds for cuts by mid-year ​

Investor Sentiment Shifts Toward Action In 2025 ​

  • Many investors now expect interest rates to remain near 4.5% this year​
  • As interest rates stay higher for longer, some investors will reposition capital by selling underperforming assets and targeting higher growth opportunities ​
  • More investors will seek assets with upside potential, focusing on creating value through upgrades, better management or some other strategy ​

Lending Conditions Show Signs of Stabilizing ​

  • Lenders report ample debt capital availability, with spreads starting to tighten ​
  • Borrowing rates across the property spectrum typically fall in the 6-percent range, leading many investors to still face negative leverage ​
  • Investors appear willing to accept short-term negative leverage if they see a path to long-term value creation ​

Forecast using Moody’s baseline scenario as of January 2025; estimate for January 2025 ​
Sources: Marcus & Millichap Research Services, Federal Reserve, Moody’s Analytics ​

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2025 Multifamily Outlook and Leading Investment Markets

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2025 Multifamily Market Outlook: Key Trends and Top Metros ​

Multifamily Demand Is Supported By Broader Housing Trends ​

  • High homeownership costs and elevated mortgage rates are steering more housing demand toward apartments ​
  • Lease renewal rates are strengthening, supported by the affordability gap between renting and owning and home ​
  • While concessions are rising, steady job growth will continue to bolster apartment absorption​

Construction Pipeline Slows, Easing Oversupply Concerns ​

  • Multifamily completions are forecast to decline to 410,000 units in 2025, a significant decline from 2024 ​
  • Rising costs for construction labor and materials are limiting the ability for new development projects to get off the ground ​
  • Slowing construction amid solid demand will allow the national vacancy rate to fall to 5.1% in 2025 ​

Top Multifamily Markets Offer Significant Growth Potential ​

  • Miami ranks first (#1) on the 2025 Multifamily Investment Forecast, upheld by strong demographic drivers, above-average rent growth and a declining vacancy rate ​
  • Dallas-Fort Worth places second (#2), with robust job growth and a thinning pipeline positioning the market for future gains ​
  • Orlando comes in at third (#3), with nation-leading rent growth projected for 2025 ​

*Forecast​
Sources: Marcus & Millichap Research Services, RealPage, Inc. ​

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