Limon Net Lease Group

Archives for February 2025

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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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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