Location Strategy Chartbook 12.21.24

Real Estate Market Insights

Jerome Powell suggested the Federal Reserve was ready to take a break from cutting rates—and that the total quantity of reductions might be shallower than previously thought.

Powell has described recent rate reductions as an effort to recalibrate borrowing costs to a more “neutral” setting. His framing raises a question that hasn’t been relevant until now: What, exactly, is “neutral” in the post-pandemic economy?

Mortgage rates jumped after the Fed cut. Remember, these mortgage surveys are not quoted with any parity/ are not normalized but can be quoted at varying costs (points) from varying respondents.

Goldman Sachs Research forecasts another solid year of global economic growth in 2025. Our economists project the US will outperform expectations while the euro area lags behind amid fresh tariffs that are anticipated from the Trump administration.

Worldwide GDP is forecast to expand 2.7% next year on an annual average basis, just above the consensus forecast of economists surveyed by Bloomberg and matching the estimated growth in 2024. US GDP is projected to increase 2.5% in 2025, well ahead of the consensus at 1.9%. The euro area economy is expected to expand 0.8%, compared to the consensus of 1.2%.

“Global labor markets have rebalanced,” Goldman Sachs Research Chief Economist Jan Hatzius writes in the team’s report titled “Macro Outlook 2025: Tailwinds (Probably) Trump Tariffs.” “Inflation has continued to trend down and is now within striking distance of central bank targets. And most central banks are well into the process of cutting interest rates back to more normal levels.”

The world’s largest economy is expected to grow faster than other developed-market countries for the third year in a row. The re-election of US President Donald Trump is predicted to result in higher tariffs on China and on imported cars, much lower immigration, some fresh tax cuts, and regulatory easing. “The biggest risk is a large across-the-board tariff, which would likely hit growth hard,” Hatzius writes.

WSJ: Inflation has eased, wage growth has been decent and Americans on average still have more in savings than they used to prepandemic. Some might even say the economy has reached a much-vaunted “soft landing.” Low-income consumers, though, aren’t feeling any of that.

Walmart Chief Executive Doug McMillon said at a conference on Dec. 3 that the “inflationary cycle has been really detrimental” for lower-income families, noting that those customers seem to be under stress. Earlier this week, convenience-store operator Casey’s General Stores said in an earnings call that it is seeing demand softness from lower-income consumers.

Howard Jackson, president of retail-focused firm HSA Consulting, estimates that inflation has actually averaged about 6.3% over the past 12 months for low-income households.

Bloomberg: The number of millionaire 401(k) accounts at Fidelity Investments rose 9.5% to a record 544,000 in the third quarter, according to an analysis released Thursday.

Accounts with less lofty balances also rose to their highest average levels since Fidelity began tracking them in 1999, the company said. Average 401(k) and 403(b) balances stood at $132,300 and $119,300, respectively, as of Sept. 30. Both types of retirement savings accounts saw a 4% rise from the prior quarter and were up 23% from a year ago.

Canyon Partners finalized fundraising for its US Real Estate Debt Fund III after amassing $1.2 billion. The fund is Canyon’s largest domestic real estate debt fund to date and nearly doubles the $650 million in commitments raised by its predecessor.

"In today's evolving economic landscape, including a higher-for-longer interest rate environment, we see significant opportunities to provide flexible capital solutions to borrowers,” Robin Potts, partner and chief investment officer at Canyon, said in a statement. “We believe we are witnessing a generational opportunity for real estate debt investing.”

According to financing firm BlackRock, the size of the global private debt market is estimated at $1.5 trillion to $2.1 trillion, and it could grow to as much as $3.5 trillion by 2028. Within the multifamily sector, data from Newmark shows debt funds accounted for 17% of loan originations through October of this year, an all-time high and more than double the share during the same period in 2019.

At Greystar, the largest apartment owner in the United States, executives also see an opportunity to capitalize on short-term loans to developers opening projects amid a 40-year high in new unit openings.

“The sweet spot today exists in transition financing,” Kevin Kaberna, an executive director at Greystar, said in a report from data firm Preqin. “A large percentage of these opportunities are in lending to developers that are trying to lease up and are carrying high-cost construction financing.”

Greystar has launched its own credit business targeting owners looking to acquire, develop, refinance and renovate multifamily projects as apartment demand — supported by wage and job growth, positive household formation, and the significant cost of homeownership relative to renting — promises to quickly take up the existing supply and construction pipelines contract.

Population growth, business expansions — particularly in the finance sector — and a ramp-up in construction spending made Charlotte and Raleigh, North Carolina, two of the fastest-growing economic regions in the United States last year, while Durham’s economy also grew more quickly than the national average, according to a new report.

Raleigh’s gross domestic product was $133.1 billion in 2023 — 9.5% higher than in 2022. That is the fourth-fastest growth rate among the top 60 markets in the country.

I have opined on several recent market studies major mixed use projects that are primarily single family where they are sited off a major thoroughfare in an exurb, that building retail earlier on in the project may be smart given the absence of, but also the very strong demand for retail. Mini-cities or mixed use communities are very much in demand and can outperform competition that doesn’t offer any nearby amenities. Amenities can come in the form of services, retail, and entertainment. The ability to walk to those amenities as they may be built within the community may also be viewed as a desirable feature.

The 1824 at Austin Point by Signorelli

"There is a dearth of retail space in the market," said Tabassum Zalotrawala, the senior vice president and chief development officer for the McDonald's food service chain, at an ICSC event this year. "This is the truth. There's not a lot of new shopping centers going out there, so one of the things that's going to be top of mind for my team, is creativity. We've got to become innovative" in finding new locations

Four of the 10 markets with the most first-generation retail space available for lease are located in Texas, as the Lonestar State accounts for nearly a third of all such space across the country.

Houston is leading the way, adding nearly 25 million square feet of retail space since the start of 2020, more than any other market in the U.S. Just under 2.5 million square feet of this space remains available today.

"Houston continues to rank among the highest in the nation for population growth. Over the past three years, it has added almost 400,000 new residents," notes Per Itziar Aguirre, CoStar's director of market analytics for Houston. "Developers are paying attention and following that strong rooftop growth, especially north and west of the city of Houston, where the bulk of the market's population growth is occurring."

Despite the relatively outsized supply growth, fears of over-building the retail sector in Texas remain minimal. "Local participants note that the market still feels incredibly tight," Aguirre adds. "Quality space in desirable locations remains hard to find, and relationships have never been more important."

JLL: A decline in new supply will impact almost all commercial real estate sectors in the U.S. and Europe. Broadly speaking, new building activity has dropped off amid continued high construction and financing costs and labor market constraints.

Nowhere is the decline in completions as extreme as in the U.S., where we forecast offices will see a 73% drop from peak levels (most notable in cities like Boston, Chicago and New York) and industrial assets a 56% decline. In Europe, there will be a 30% drop-off in new office completions with competition for prime space likely to be particularly strong in cities including London, Madrid and Warsaw. We expect similar or larger declines in new industrial space in Germany and the UK. The Asia Pacific region is an outlier, driven by more favorable construction and demand conditions. Only industrial space deliveries will see a slight decline from peak levels.

Over the last cycle, some of the highest five-year returns were achieved with investments transacted between 2009 and 2011, in the immediate aftermath of the Global Financial Crisis (GFC). In fact, CRE assets have outperformed most other asset classes over every five-year horizon since 1998 and, even during the GFC, investors with a five-year hold period in aggregate saw positive returns.

As we leave the dislocation of the end of the last cycle behind us and look toward the upswing, investors deploying capital in 2025 are likely to see an early-mover advantage in terms of returns that will diminish as the cycle matures. Intensifying supply shortages as completions slow in 2025 will amplify competition for quality existing assets as more investors re-enter the market.

We are already seeing signs of a new liquidity cycle. More capital is showing up to the table and bidding on opportunities, and institutional investors are returning to the market with a renewed appetite for real estate. In last year’s outlook we noted the challenging balance of defense and offense as the market tried to find its footing. Now, the fear of making a mistake is being overtaken by the fear of missing out.

The implications for capital markets are becoming clearer. Over the next year, the bid-ask gap will continue to narrow as we see more transactional activity and market conditions steady; falling policy interest rates will help further stabilize the costs of debt and support renewed growth in debt origination volumes; yield compression will continue for in-favor sectors, including living, logistics and select alternative asset classes.