Research Brief

• Elevated interest rates likely to curb national hiring trends
• The leading job creation markets
• Two resources to help you refine your investment strategy

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• Multifamily demand on the rise as consumer sentiment boosts household formation
• Surge of small business optimism could portend strengthened CRE space demand
• Slackening new construction bolsters long-term CRE outlook

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What’s Shaping the 5-Year Commercial Real Estate Outlook? ​​

Demographics Will Fuel Space Demand Across Property Types ​

• The U.S. has some of the most favorable demographics in the world, with over 70 million Baby Boomers, Millennials and Gen Zs ​
• Baby Boomers are fueling medial office and seniors housing demand, while Millennials and Gen Z spur demand for rental and owner-occupied housing​
• Retail and industrial demand also supported by spending across generations ​

Construction Activity Faces Long-Term Slowdown ​

• Elevated construction costs will inhibit substantial supply additions across each property type over the long-term ​
• Key factors driving rising construction expenses include the high cost of debt capital, rising materials and labor costs, rising land costs and increased administrative fees ​
• The construction slowdown amid positive demographic gains is expected to bolster the financial performance of real estate assets in the years to come ​

Capital Flows Into Commercial Real Estate Remain Strong ​

• Real estate capital flows have steadily increased — 2007’s initial-record deal count was exceeded in 2014 and has been surpassed in every year after ​
• Increased CRE data availability, professional management, lending liquidity, and the emergence of broad-based syndication have helped make commercial real estate a more mainstream investment option ​
• Aging Baby Boomers and the Silent Generation will transfer an estimated $84 trillion to younger generations, likely sparking additional capital flows into commercial real estate investment ​

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

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Is Real Estate Construction Entering a Prolonged Downturn? ​

Commercial Real Estate Construction Set To Decline Dramatically ​

• New development expected to drop across property types — including apartments and industrial — which noted all-time high supply in 2024 and 2023, respectively ​
• Office and retail construction has already been minimal over the past few years, with causes likely extending beyond the real estate cycle ​
• Long-term supply constraints support existing property performance, aiding rent growth, occupancy and valuations over time ​

Construction Sector Faces Labor Shortages And Skills Gaps ​

• Baby Boomer retirements are depleting the construction workforce, shrinking the pool of experienced workers in the sector ​
• Younger generations are prioritizing college education over trades, limiting the pipeline of new construction talent ​
• A potential slowdown in immigration could further exacerbate skilled construction labor shortages and constrain real estate supply ​

Capital And Material Costs May Worsen Construction Challenges ​

• Construction loans now carry interest rates typically above 8%, limiting access to financing for new development projects ​
• Prices for construction materials like lumber, steel and cement could rise if President-Elect Trump institutes new tariffs on imports ​
• Higher financing and material costs may further suppress development, compounding long-term supply constraints ​

*Index: 2016=100, not seasonally adjusted​
Pandemic period not shown due to outsized impact of supply chain issues on the price of softwood lumber ​
Sources: Marcus & Millichap Research Services, BLS ​

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Holiday Retail Sales: ​Will Rising Sentiment Support Spending?

Holiday Retail Sales Forecasts Call For Modest Growth This Year

• Holiday retail sales are a crucial part of the commercial real estate performance landscape, and have downstream impacts on retail and industrial properties, self-storage and even the housing market
• National Retail Federation (NRF) and International Council for Shopping Centers (ICSC) forecast holiday sales growth between +2.5% and +3.5% this year
• However, the growth forecasts range from -0.1% to +0.8% when accounting for inflation

Consumer Finances Are Strong, Supporting Spending Outlooks

• U.S. employment at a record high, with 159 million jobs as of October
• Wages are up significantly since 2019, balancing out recent increases in consumer debt
• Inflation-adjusted savings levels are $4 trillion higher than February 2020

Sentiment And Confidence Remain Key Spending Drivers

• Consumer confidence and sentiment are improving but remain below pre-pandemic levels
• Post-election positivity may boost short-term sentiment, supporting holiday retail sales
• Strong holiday sales would also be a positive signal for retail properties and rental housing demand​

* Forecast
Store-based sales exclude non-store retailers, restaurants, gas and auto dealers; Forecast from NRF & ICSC; holiday spending Nov. & Dec.
Sources: Marcus & Millichap Research Services, U.S. Census Bureau, National Retail Federation, ICSC

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How New Immigration Policies Could Impact the CRE Landscape ​

New Immigration Policies Could Reshape The Labor Market ​

• Restrictive policies during Trump’s first term led to declining legal immigration, falling from 1 million annually in 2015-2016 to 570,000 by 2019​
• Reduced immigration intensified labor shortages, driving wage growth and inflation.​
• A similar approach under the new administration could exacerbate labor shortages, with broad economic impacts ​

Key Industries May Face Heightened Operational Challenges ​

• Sectors reliant on foreign-born workers — like agriculture and construction — could experience labor supply shortages​
• Service-oriented sectors — such as hospitality, food services and health care, are likely to see rising operational costs ​

Commercial Real Estate Faces Increased Inflationary Risk ​

• Rising development and operating costs could weigh on property performance, particularly in retail, hospitality, and senior housing.​
• Higher wage-driven inflation could pressure the Federal Reserve to maintain elevated interest rates, keeping the cost of debt capital high​

*Through 3Q; Share of labor force by industry as of 2023​
Sources: Marcus & Millichap Research Services, BLS

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