Daily Dose of Real Estate for December 17

The Daily Dose of Real Estate for December 17, 2024 brings you a comprehensive look at the latest trends shaping residential, commercial, and mortgage markets across the United States. From shifting housing dynamics to evolving REIT performances, we've got you covered on the key developments impacting the real estate landscape as we look towards 2025.

Key Takeaways

• Residential market shows signs of thawing with mortgage rates easing and sales activity picking up in some regions
• Commercial real estate faces a mixed landscape in 2025, with CBRE forecasting a soft landing and sector-specific opportunities
• Mortgage market sees uptick in applications as rates decline, though overall origination volumes remain subdued
• REIT performance varies widely by sector, reflecting broader commercial real estate trends
• CMBS market grapples with economic uncertainty, impacting both issuance and performance

Residential Real Estate Markets: A Glimmer of Hope Amidst Challenges

The residential real estate market is showing early signs of improvement as we close out 2024, though challenges persist. According to Zillow's latest forecast, home sales are expected to rise slightly to 4.16 million in 2025, up from 4.06 million in 2024. This modest increase comes as mortgage rates have begun to ease, providing some relief to potential buyers who have been sidelined by affordability concerns.

Mortgage rates, the key driver of market activity, have shown a downward trend in recent weeks. The Freddie Mac Primary Mortgage Market Survey reports that the average rate on a 30-year fixed mortgage dropped to 6.6% from 6.69% last week. This decline, while modest, has been enough to spur increased interest from both buyers and refinancers.

Despite these positive signs, the market still faces significant headwinds. Fannie Mae's Economic and Strategic Research Group predicts that affordability challenges and the "lock-in effect" will keep housing activity subdued in 2025. They anticipate that existing home sales will move only slightly upward from recent multi-decade lows.

Looking ahead to 2025, the residential market faces a complex landscape. While lower mortgage rates may unlock some pent-up demand, affordability concerns and the "lock-in effect" continue to pose significant hurdles. Regional variations will play a crucial role, with some markets likely to outperform others based on local economic conditions and migration patterns.

Mortgage Markets: Navigating a New Normal

The mortgage market in 2024 has been characterized by significant shifts in origination volumes, refinancing activity, and lender dynamics. The Consumer Financial Protection Bureau's 2023 Mortgage Market Activity and Trends report provides valuable insights into these changes, many of which have continued into 2024.

Origination volumes have seen a marked decline. The CFPB report notes that loan applications and originations dropped by about a third from 2022 to 2023. This trend has persisted into 2024, with the market adjusting to higher interest rates and reduced refinancing activity.

Looking ahead to 2025, mortgage market predictions vary. Fannie Mae's forecastsuggests that average mortgage rates will decline modestly but remain above 6%, with periods of volatility likely. This aligns with projections from the Mortgage Bankers Association, which anticipates the 30-year fixed-rate mortgage to average 6.6% in the fourth quarter of 2024 and tick down to 6.5% in the second quarter of 2025.

As we move into 2025, the mortgage market is expected to see modest improvements in origination volumes as rates stabilize. However, competition among lenders will remain fierce, with non-bank lenders likely to continue gaining market share. This evolving landscape may reshape the competitive dynamics of the mortgage industry in the coming year.

Commercial Real Estate Markets: Navigating Challenges and Opportunities in 2025

The commercial real estate (CRE) market in 2024 has been characterized by significant divergences between property types, with some sectors thriving while others face ongoing challenges. As we look towards 2025, CBRE's U.S. Real Estate Market Outlook provides valuable insights into the trends and opportunities that will shape the market in the coming year.

Economic Outlook and Its Impact on CRE

CBRE forecasts a soft landing for the U.S. economy in 2025, with GDP growth expected to accelerate to 1.8%. This improved economic outlook is anticipated to have a positive impact on the commercial real estate sector. Key economic factors influencing CRE include:

• Inflation is expected to moderate to 2.5% by the end of 2025
• The Federal Funds rate is projected to decrease to 3.75% by year-end 2025
• Job growth is forecast to remain positive, adding 1.5 million new jobs in 2025

These economic conditions are expected to create a more favorable environment for CRE investment and development compared to the challenges faced in 2023 and 2024.

Office Sector: Adapting to New Realities

The office sector continues to face significant challenges as it adapts to evolving work patterns. CBRE's outlook for the office market in 2025 includes:

• Vacancy rates are expected to peak in early 2025 at 19.5% before gradually improving
• Leasing activity is projected to increase by 10-15% in 2025, driven by pent-up demand and more stable economic conditions
• Flight to quality remains a key trend, with tenants favoring newer, amenity-rich buildings

Despite these challenges, CBRE notes that office is not going away. The report emphasizes that office space remains crucial for collaboration, innovation, and company culture, even as hybrid work models persist.

Industrial and Logistics: Continued Strength

The industrial sector is expected to remain a top performer in 2025, benefiting from ongoing e-commerce growth and supply chain reconfiguration. Key predictions include:

• Rent growth of 5-7% in 2025, moderating from the double-digit increases seen in recent years
• Vacancy rates are projected to remain low at 4-5%
• New supply is expected to decrease by 25-30% in 2025 due to tighter lending conditions

CBRE highlights that the industrial sector's fundamentals remain strong, with demand expected to outpace new supply in many markets.

Retail: Selective Opportunities

The retail sector shows signs of stabilization and selective growth opportunities in 2025:

• Neighborhood centers and grocery-anchored retail are expected to perform well
• Experiential retail continues to drive foot traffic and sales
• Retail-to-industrial conversions are anticipated to increase, particularly for underperforming assets

CBRE notes that while challenges remain, particularly for lower-quality assets, there are opportunities for investors in well-located, high-quality retail properties.

Multifamily: Moderating Growth

The multifamily sector is expected to see more moderate growth in 2025 as new supply comes online:

• Rent growth is forecast to stabilize at 2-3% in 2025
• Occupancy rates are projected to remain healthy at around 95%
• New supply is expected to peak in 2024 before moderating in 2025

CBRE emphasizes that demographic trends and ongoing affordability challenges in the for-sale housing market continue to support long-term demand for multifamily properties.

Investment Outlook

CBRE anticipates a more favorable investment environment in 2025, driven by improved economic conditions and greater price discovery. Key investment trends include:

• Transaction volume is expected to increase by 10-15% in 2025
• Cap rates are projected to compress slightly as interest rates stabilize
• Private capital is anticipated to play a significant role in CRE investment

The report highlights that while challenges remain, particularly in the office sector, there are opportunities for well-capitalized investors across various property types and markets.

CMBS/REIT Markets: Navigating Uncertainty

The Commercial Mortgage-Backed Securities (CMBS) and Real Estate Investment Trust (REIT) markets have faced a challenging environment in 2024, reflecting broader trends in the commercial real estate sector and the overall economy.

CMBS issuance and performance have been impacted by economic uncertainty and sector-specific challenges. The office sector, in particular, has been a source of concern for CMBS investors, with many loans backed by office properties facing increased scrutiny due to lower occupancy rates and uncertain long-term demand.

REITs have shown divergent performance based on property type. According to data from Nareit, industrial, data center, and infrastructure REITs have generally outperformed, while office and some retail REITs have struggled. This aligns with broader trends in the commercial real estate market.

Looking ahead to 2025, REIT and CMBS investors will need to focus on careful sector selection and quality assets. The ongoing evolution of the REIT market towards non-traditional property types offers both opportunities and risks. The improved economic outlook projected by CBRE may provide a more stable environment for these markets, but challenges are likely to persist, particularly in sectors facing structural changes.

The Road Ahead: Navigating the 2025 Real Estate Landscape

As we approach 2025, the real estate market presents a nuanced landscape of challenges and opportunities across various sectors. CBRE's outlook suggests a more favorable environment overall, with improving economic conditions creating potential across different property types. Key trends to watch include:

• Residential market shows signs of gradual improvement, contingent on easing mortgage rates, though affordability remains a significant hurdle.
• Commercial real estate faces continued sector divergence, with industrial and multifamily properties likely to outperform, while office and some retail assets navigate ongoing challenges.
• The mortgage market is poised for modest improvements, amid intense lender competition and evolving market dynamics.
• REIT and CMBS investors will need to focus on careful sector selection and quality assets, particularly as the REIT market continues to evolve towards non-traditional property types.

Crucially, regional variations will play a significant role in market performance across all sectors. Success in 2025 will hinge on staying informed about local economic conditions, migration patterns, and regulatory environments.

As the real estate landscape continues to evolve, adaptability and informed decision-making will be key. Industry professionals should leverage insights from comprehensive market analyses, such as CBRE's outlook, to navigate the complexities and capitalize on emerging opportunities in the dynamic year ahead.

Impact Capitol DC SitusAMC Mortgage Bankers Association Mortgage Professional America National MI National Association of REALTORS® National Mortgage News National Association of Home Builders National Reverse Mortgage Lenders Association (NRMLA) Federal Reserve Board Federal Reserve Bank of Richmond Federal Reserve Bank of St. Louis Federal Home Loan Bank of San Francisco Federal Housing Finance Agency Federal Housing Administration and HUD Office of Housing Fannie Mae Freddie Mac Consumer Financial Protection Bureau The White House