JMS Real Estate & Development

Real Estate Snapshot

2025-02-03

What’s the outlook for real estate in 2025? In 2024, long-term interest rates rose, then fell, then rose again; this graph gives a long-term perspective on mortgage rates:

While down from their peak in 2023, mortgage rates remain at levels largely unseen since the Financial Crisis of 2008. Inflation fears, tight monetary policy by the Fed, and fiscal deficit and debt concerns have likely contributed to this rate rise; tariff worries and global uncertainty may also have had an impact. It’s possible that longer-term rates will decline in 2025, but hardly guaranteed—the Fed and markets believe that the federal funds rate will only drop about 50bp this year.

The overall outlook for the commercial real estate market is mixed. A Moody’s analysis noted that the office sector has struggled with vacancies:

The review did suggest, however, that the office sector may be stabilizing after the pandemic-induced shift to remote and hybrid work. JPMorgan also expressed cautious optimism that the office market may be normalizing.

Multifamily housing saw mixed results, with increased construction in some metro areas, such as Austin and Raleigh-Durham, leading to higher vacancy rates. However, such imbalances between supply and demand may dissipate over time.

The retail and industrial sectors have been steady over the past year in terms of vacancies; the retail sector has benefitted from the strong economy and consumer demand, while the industrial sector is seeing its construction surge soften under higher interest rates and cooling demand.

Vacancy rates are about 6% for the apartment sector, 20% for the office sector, 10% for the retail sector, and 7% for the industrial sector.

Cap rates range from 5%-7% for each of these sectors, with multifamily and industrials coming in between 5.0% and 5.5%, and office and retail coming in at about 6.5%. CBRE projects cap rates to fall by 20bp-40bp in 2025, and stabilize at around 4.5%-4.6% for the multifamily, retail, and industrial sectors, and at about 5.0% for the office sector. These cap rates are higher than those seen pre-pandemic, largely due to higher long-term interest rates.

Electoral Aftermath

2024-11-18

Elections have consequences. Donald Trump’s election, along with Republican control of the House and Senate, and a 6-3 conservative majority in the Supreme Court, is likely to have far-reaching consequences. In this piece we’ll give our initial impressions of the impact of Trump’s election on the economy, with a particular emphasis on real estate. With few specific tea leaves we can read, we’ll be focusing more on broader economic forces.

After falling for much of the year, interest rates began to rise again in October as Trump’s polling improved, and have risen further after the election. The 10-year Treasury rate and 30-year Treasury rate have climbed about 70bp and 50bp, respectively, since October 1^st. One plausible explanation for these rate increases is that markets anticipate that the Trump Administration will pass further tax cuts which will cause already high deficits to swell even further.

In response, the Fed may keep monetary policy more restrictive than previously anticipated.

Many of Trump’s other policies also carry the risk of increasing inflation. Tariffs are likely to put upward pressure on the price of goods. Large-scale deportations of illegal immigrants are likely to put upward pressure on wages. If the threat of inflation grows the Fed may be reluctant to continue lowering the federal funds rate—indeed, market expectations have shifted to anticipating only a 75bp reduction from now through December of 2025. Trump may pressure the Fed into lowering rates, but even success on that front would run the risk of reinvigorating inflation. It seems highly unlikely that the ultra-low rates of the 2010s will return, but the path of rates is uncertain, as it is dependent on a number of forthcoming decisions by Trump, Congress, and the Fed.

The likely extension of the Trump tax cuts, including pass-through deductions, like-kind exchanges, and lower capital gains rates, should help commercial real estate. Trump proposals that affect the residential housing market would be more mixed. Deregulation should lower housing costs, but many regulations are state and local rather than federal in origin. Opening up more federal lands for housing may have a marginal impact, but these lands are typically in rural areas, while the housing shortage is most prevalent in urban regions. On the other hand, a crackdown on illegal immigration could raise construction costs by reducing the size of the construction workforce, which is heavily reliant on immigrant labor. Tariffs would also likely raise the costs of some building materials, such as lumber.

Economic forecasting is extremely difficult, and even more so in an environment of potential mass deportations and a tariff regime that, depending on their levels, exemptions, and retaliatory responses from other countries, could have enormous implications for all sectors of the economy. We don’t know what Trump will do if inflation starts to rise again, or if the agricultural and construction industries sound the alarm that the immigration crackdown is decimating their workforce. We would expect some benefits from lower taxes for the real estate industry and broader areas of the economy, but we no longer have the economic slack that we had in 2017—at some point we expect to see tension between fiscal/tariff/immigration policy, inflation, and interest rates, and it's unknowable at this time how such tension will be resolved.

A Brief History of Interest Rates

2024-11-01

The Federal Open Market Committee voted in September to lower the federal funds rate by 50 basis points, or 0.5%. This rate cut marks the beginning of a dovish turn for the Fed, after a sharp and historically swift spike in rates to combat post-COVID inflation. How much and how quickly did rates rise? 5.25% in a less than 2 years, as per Forbes’s Michael Adams:

Source: Forbes.com

To get perspective on how quickly the Fed hiked its target rates, we can view this graph from the St. Louis Fed:

The rate hikes of 2022-2023 were the steepest we’ve seen in over three decades. Fortunately, inflation cooled significantly and has been approaching the Fed’s 2% target, thereby enabling the Fed to start easing monetary policy. However, the pace and scale of rate cuts will still depend on inflation data, labor market data, and other economic data.

Mortgage rates have also eased as markets anticipated the Fed’s dovish pivot.

From October of 2023 to September of 2024 the U.S. 30-year fixed rate mortgage average fell from 7.79% to 6.08%, though it has crept up to 6.44% in October. While these mortgage rates are certainly high when compared to the ultra-low rates we saw in the 2010s, a longer lookback provides deeper context:

Thankfully, mortgage rates have left the 1980s behind; current rates are comparable to those found from 2000-2008. There is the possibility of rates dropping further, given that the Fed is anticipating making additional rate cuts:

Both the Fed and markets expect the federal funds rate to fall about 2% over the next 2 years. Past history suggests that if the Fed keeps cutting rates, mortgage rates will continue to fall:

However, while the federal funds rate and mortgage rates have tended to move in tandem, steep movements in the federal funds rate have typically been accompanied by more modest movements in mortgage rates. So even if the Fed cuts rates an additional 2% by 2026, we would project mortgage rates to fall by a smaller amount.

There’s also the possibility of unexpected economic events. Inflation could reemerge—fiscal policy is currently stimulative, deficits are high, and neither Donand Trump and Kamala Harris are campaigning on fiscal conservatism. Or economic conditions could revert back to those found in the 2010s, and ultralow rates could prevail once again. Mortgage rates are in a better place for buyers than they were a year ago, and there’s reasonable grounds for optimism for a more benign rate environment, but only time will tell.