Market participants in 2024 navigated a higher for longer interest rate environment, soaring insurance costs, debt maturities, lofty construction costs, economic uncertainty, and political turmoil. Banks and other lenders struggled to underwrite new loans and refinance maturing ones while potential buyers and sellers were faced with a bid/ask spread when arriving at the fair values. Despite all of this, commercial real estate remained resilient.
Dealmakers anticipate a much busier 2025 as market fundamentals remain steady for most sectors, except the Class B/C offices. The Fed’s recent 100bps of rate cuts have paved the way to boost investment sentiment. We have a strong economy with positive consumer spending, a steady job market but sticky inflation. While consumer spending continues, they are stressed, according to The Conference Board’s consumer confidence index (a measure of consumer confidence in the US) which showed an unexpected decrease to 104.7 in December. This is down from 112.8 in November and marking the first decline in three months.
There has been a rise in loan delinquencies given the number of properties suffering from loan maturities, rising vacancies, and operating costs. The number of borrowers using short term, interest only debt payments with large balloon payments are starting to feeling the heat. Given this, some see 2025 as a year where lenders and borrowers are forced to acknowledge that lower interest rates are not going to save them thus paving the way for loan pool sales and/or a wave of distressed assets.
The year ended with the re-election of President Trump, and his new administration will have an effect on the economy. National policy decisions on tariffs, immigration, budget proposals and tax laws will all affect GDP growth, inflation, and international trade activity, not to mention the new administration orders for bank auditors and how the Department of Government Efficiency (DOGE) reshapes government spending like office space needs.
In addition, Congress at the last minute passed a stopgap funding bill to keep the government running until March 14, 2025. This sets up a potential funding battle toward the end of President-elect Donald Trump’s first 100 days. Bank analysts are predicting the dollar will peak in mid-2025 and then decline as the incoming president’s policies and Federal Reserve interest-rate cuts exert pressure. Also watch as the provisions from the 2017 Tax Cuts and Jobs Act could survive the legislation’s 2025 expiration date.
Commercial real estate is local, but it often times echoes what is going on in the macro environments. Overall, we found Delaware to be good aside for older Class B/C office buildings. We found the investment market to be steady and picking up as it seemingly hit an inflection point this summer when sales larger than $10 million dollars were up 290 percent between July to October versus the first six months of 2024. The Q4 market fundamentals for the various property sectors are summarized below and remain steady thanks to limited new supply.
