Assessing How First 100 Days of 2025 Will Shape the Road Ahead for CRE

By Partner Valuation Advisors Eric Enloe

The first 100 days of 2025 welcomed a new administration and ushered in a near daily batch of executive orders, new policies and initiatives. As the quarter ends, it is an appropriate moment to reflect on what’s transpired, while preparing a roadmap for what’s ahead. The shifts and announcements from the White House certainly created intrigue and uncertainty, though overall an environment emerged that is helping foster an increasingly positive investor sentiment, where prices more closely match bond yields, and more readily available debt and large decreases in short-term interest rates were experienced. The dark clouds on the horizon were geopolitical uncertainty, slumped transaction volumes and persistently high long-term interest rates – as many market participants pause to gain a better understanding of the future.

Quarter Highlights

The highlight themes that merited watching the past quarter included tariffs, the movement of the 10-year Treasury, talk of a recession, big investors exhibiting bullish attitudes, negative leverage showing up in multifamily asset transactions, bankruptcies and a potential positive shift in the office sector.

Tariffs are a great unknown. It is not certain how they will impact the commercial real estate markets, though investor confidence has been shaken in the short-term. In the long run, tariffs could wind up as a positive impact.

The 10-Year Treasury experienced downward movement. It has decreased to nearly 4% after sitting in the 4.5% to 4.6% range in January. That bodes well for real estate. Yet, the flip side is that shift could also usher in more talk of a recession. As the Treasury is driven down, many experts believe recessions follow.

During the quarter, the largest investors in commercial real estate began feeling bullish and adopted aggressive positions. Institutional firms like Blackstone and KKR refinanced large portfolios. These big players tended to rely on CMBS primarily to fuel acquisition activities. They believe the future will likely be better than it is currently.

In the multifamily sector, a micro trend showed up – that being acquisitions of assets with negative leverage with cap rates below debt. This trend was evident especially in supply constrained markets. Investors are bullish about acquiring multifamily assets because the exit cap rate is expected to be below today’s rate, which should benefit investors.

The market has experienced a number of bankruptcies this past quarter including Party City, The Container Store, Big Lots and Forever 21, to name a few high profile retailers. That has created significant noise in the retail sector, especially since these bankruptcy filings have occurred in a cluster. Big REIT’s are likely fine taking back these assets now, especially if they are able to lease the properties at higher lease rates. That may be the case with top, high quality centers that are performing well and situated in high demand locations. Though if the bankruptcy involves a center experiencing challenges and tougher times, that might not be as easy of a path to take for landlords.

Another key positive highlight of the first quarter was the fact that the sun finally peeked from behind the dark cloud on the office sector. Momentum began to build as office assets are now financeable, which hasn’t been the case for the last two years. An example of that was the strong interest shown for high quality office assets like 590 Madison in New York.

Diving Deeper into the Trends 

The new White House administration immediately began implementing policies it promised on the campaign trail, which should eventually produce positive results in commercial real estate, including increased demand for real estate in this country. There’s certainly a little bit of concern about what impact the tariffs could have on industrial space demand, or what they could do to retailers. That may also have the potential impact of encouraging additional industrial development in the U.S. Generally, companies would rather have their manufacturing in the US, but it is a function of production cost and having more cost effective options abroad. It will be very interesting to see how this plays out. Overall, having a new Presidential administration has been viewed as a net positive for the commercial real estate industry. Now that the uncertainty of who is running the country is behind the country, larger institutional investors are working to create their business plans and execute their investment thesis. They are anxious to find opportunities to deploy dry powder that has been pent up.

A vital component to watch in 2025 is whether big banks get back to lending. The accepted overall view is they will make capital available. They have been repaid on loans they made so they have cash to get back in market. They could underwrite today on defined criteria versus the problem loans they may have on the books now.

The market also needs to see how assets that were acquired in 2021 and 2022 at record high prices are flowing through the system, whether that be a refinancing, taking the property back or another option to flush them out. We have seen some challenges to refinancing CMBS loans. 

A potential issue facing the office sector’s recovery is will the return to work efforts succeed. Big companies like Amazon, Apple, Disney, IBM, JPMorgan Chase, and Walmart mandated a return to office. Other companies like AT&T, Boeing, Dell Technologies, and Citigroup have also implemented return-to-office policies. Will employees adhere to those orders and what happens if the mandates don’t stick? On the Federal level, government employees may elect to resign rather than come back to the office, and that could result in a reduction of the Federal office portfolio. That could produce opportunities to buy at an attractive entry price and redevelop those buildings.

Chilling Impact of Multifamily Rent Restrictions

Rent restrictions are having a chilling effect on the apartment market. A prime example of this is in Montgomery County and Prince George’s County near Washington, DC. Last year they enacted laws that limited rent increases (respectively 6%, or 3% plus the inflation rate, whichever is lower). Increases are restricted on occupied as well as vacant units. Those strict laws were cited as reasons why multifamily transaction volume in both counties was down 13% in the first three quarters of 2024 compared with the same period in 2023, according to data from MSCI Real Assets. The new legislation is also impacting multifamily owners’ ability to secure loans for capital improvements or to redevelop assets, since exemptions are not clear-cut. The new rent laws are likely also deterring institutional investors from acquiring assets in those areas since there are less stringent regulatory environments in other nearby markets, which makes their investment decisions much clearer. That is likely the reason why multifamily transaction volumes rose 155% over the first nine months of 2024 compared with the same period in 2023 in nearby northern Virginia. Northern Virginia has risen to become a top three markets nationally for institutional multifamily investment.

Office Opportunities

The best opportunities will follow the fundamental supply and demand equation. A contrarian view is office. On one hand, there’s too much B and C class office that does not have a great future. Yet conversely there is plenty of Class A and B plus office that is well located but simply needs a little bit of love. Return to office continues to improve and there’s some positive leasing traction pertaining to Class A office. The levels of tenant improvement allowances and rent abatement are substantial, but at the right basis some incredible buying opportunities are emerging. 

Industrial Demand

Industrial will continue to be in demand, especially around the ports, around transportation, around major airports, and rail will continue to be important. There is also a significant amount of non-functional industrial space in this country that has 20-foot clear ceiling heights, which is obsolete compared to a modern industrial building that features 30-foot plus clear height. That functional obsolescence will likely produce a host of redevelopment opportunities from an infill perspective on industrial, as well as new bulk distribution development on larger land sites where real opportunities could be captured. 

Retail Darling

Retail has really been somewhat of the darling in the last year of the core four property types. Much of that is the capitalization rates in 2021 and 2022 didn’t dip down to the same levels as multifamily and industrial. So as a result, there was less of a value adjustment to make when borrowing rates skyrocketed. The exception would be malls that are considered dead malls, which are a whole other category. But the community centers, and grocery anchored centers are the darlings in retail that have held up. 

The pandemic placed a momentary halt to shopping in a physical retail center. After the pandemic there was a big question if people would go out and want to shop again, after they had gotten used to online retail out of necessity. But we are seeing retail centers performing well with strong retail sales volumes. A recent valuation assignment we completed involved a 300,000-square-foot luxury center that was exceeding $2,500-per-square-foot in sales, which is staggering and makes it one of the top centers in the country. National retailers overall are strong, though there’s certainly some concern about the longevity of big department stores. We’ve seen some close and the demise of the traditional anchor store is opening up opportunities for different types of anchor retail. 

Advice Strategy

There are several strategies investors, owners or developers can employ to navigate the landscape in 2025. There are a few factors investors must consider when developing their strategies. They are weighing the positives like the interest rate cuts and a positive business environment coming out of the election, as well as a little negative such as the Treasury shift and recent tariffs. Once the dust from the tariffs settles down, a long-term plan can be formulated. Strategies must be always anchored on fundamentals and finding out what supply and demand in a market looks like. It doesn’t matter if we are in a high inflationary market, a high interest rate market, or a low interest rate market. Certainly in a low interest rate market, there’s more wiggle room and a little more room for error, whereas that doesn’t exist in a high interest rate market. 

Once an investor knows what supply and demand looks like they can determine what a market’s prospects are. For instance, you can’t paint all office as a bad investment, despite the challenges that sector faces, there are some fantastic opportunities. Switching over to multifamily, there are a few markets that are oversupplied. Austin and Nashville are good examples of markets that are oversupplied from a multifamily perspective. But that doesn’t necessarily mean investors should lose any sleep about Austin or Nashville. I think those are going to be two of the best performing multifamily markets in the country over a five year or 10 year time horizon, but they’re in a rough patch due to the fundamentals. 

There is a lot of noise out there that values are down x in this market, and values are down y in this market, or this product type is so challenged. That may be true, but you can’t paint everything with a broad brush. There are some interesting opportunities as a result of some dislocation in markets that has created some smart buying opportunities in growth markets where an investor can get in at a basis that they look back in three to five years with a big smile because they captured a really strong opportunistic buying opportunity and with patient money were able to generate outsized returns. 

Interest Rates & Tariffs

The interest rate reductions last year and the change to a new White House Administration have been viewed as positive developments for real estate investors, and capital has been impacted in a good way. Tariffs being levied on the U.S.’s large trading partners are being keenly watched and has caused investors to become skittish about market conditions. The impacts for commercial real estate markets could be large or small depending on the length of the tariffs or the ability of key industries to negotiate carveouts. A potential long-term positive result of tariffs could be increased manufacturing activity, jobs, as well as increased exports by U.S. companies should other countries lower their tariffs on U.S. goods and barriers to inbound capital flow. Clearly, in the short-term volatility is expected to create uncertainty and that rarely if ever encourages a positive business outlook or increased investment.

Yet, the 10-Year Treasury movement negatively impacts the cost of capital. That’s taken a little bit of the wind out of the sails of those interest rate cuts. But overall, what’s changed to the positive is the sentiment and it started with the 50 basis point cut – that was followed up with two subsequent quarter-point rate cuts – because there were a lot of investors on the sidelines. They were needing to get assets out in the market to sell. They want to get their capital back, whether it’s to return to investors or invest in new projects, and they’ve been on the sidelines. 

The announced policies of the new Presidential administration are intended to be more accommodating for business, though there is no guarantee that the Fed will continue making rate cuts. The 50 basis point cut that the Fed initially made was viewed favorably because it instilled positive feelings that the future will be better than it is today as it pertains to real estate values. However, recently the Fed has announced that they will be taking a wait and see approach. And from a lending perspective, what’s held up lending in many ways is uncertainty on where values stand, and it’s held up the entire market. It’s kept investors from listing properties for sale. Even when they do place an asset up for sale, buyers and sellers are not able to meet at an acceptable price to each party, which means there’s not sufficient clarification on where pricing is. We are seeing that gap narrow, which is the most positive shift because what we need for healthy markets is a steady flow of transactions – properties clearing the market. It gives comfort for lenders. It gives comfort to buyers. It establishes a price point for sellers. It helps valuation experts like us  determine values. It really helps brokers because they can be even more detailed in their analysis because they can point to actual transactions. 

Healthy markets have a regular flow of transactions and this sense of optimism that came from the interest rate cuts leads everyone to believe there will be more transactions. Sellers are wanting to get properties out there and expose them more, and the market always speaks. In a good market, bad market, the market will speak on what an asset is worth. The market has been speaking in the last year and a half and either people didn’t like it or agree with what the market was saying but now there’s going to be a meeting in the middle and we’re going to see trades, and that’s healthy for the market. 

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