Commercial/Multifamily Financing Update

Treasuries have come in 20bps over the past month as the market has adjusted to the reality that the Fed won't be cutting as much next year. The expectation is the Fed will cut 25bps next week?and another 50bps of cuts by May 2025.? We have highlighted several resources and publications below, designed to offer insights into the constantly evolving market and their impact on the real estate sector.

• Weakness Appears in the Labor Market:?Nonfarm payrolls increased by 227,000 jobs, more than what economists had expected. However, underneath the headline numbers, signs of a slowdown in the labor market are emerging.?Read More
• Banks Sneak Back Into CRE Lending Through Private Equity Firms:?As of the third quarter, banks accounted for?just 18%?of loan origination, down from 38% a year earlier, according to a report by?CBRE.?Read More
• Would-Be Buyers Picking High-End Rentals Over Starter Homes:?Do you know one or more of the many would-be buyers who can’t afford to enter the housing market? Given still-high interest rates and a dearth of existing homes, they are in a tough spot. But for some of these people, there’s an offsetting upside.?Read More
• Beyond 'Retail-Curious,' Investors Are Ready For A Store Spending Spree:?Strong fundamentals and demonstrated resilience over a challenging 15-year stint have positioned the U.S. retail sector to capture an outsized portion of the nascent commercial real estate capital markets recovery.?Read More
• Commercial Real Estate Investment Volume Stabilizes At $90B In Q3:?Commercial real estate (CRE) investment volume stabilized at $90 billion in the third quarter, according to a third quarter report by CBRE.?Read More

U.S. Real Estate Market Outlook 2025

Commercial real estate fundamentals are in relatively good shape as we enter 2025, with even the distressed office sector benefiting from improved leasing activity. Our industry has suffered profound shocks over the past four years from the pandemic, high inflation, rising interest rates and a surge in construction completions. That real estate has weathered these formidable challenges is testimony to the asset class’s resilience and its role as the bedrock of business operations.

- Richard Barkham (CBRE's?Global Chief Economist & Global Head of Research

Executive Summary

• Despite many uncertainties, the?U.S. economy is poised for growth in 2025, driven by consumer spending, easing financial conditions and productivity gains. While retail and data centers have been supported by longer-term trends, all other real estate sectors will see the start of a new cycle.
• Economic growth and firming real estate fundamentals will drive?a moderate recovery in real estate investment activity?in 2025, even though the 10-year Treasury yield will remain above 4%. Capitalization rates will compress slightly. Investors have the opportunity to secure long-term returns that have not been available for many years.
• 2025 will see the?office up-cycle that began in 2024 gain traction, with shortages of prime space emerging toward year-end. Expect a steady office revival in America’s downtowns.
• Retail enters 2025 with the lowest vacancy rate of any commercial real estate sector. Although retailers will further consolidate, we expect?growing demand in suburban locations and Sun Belt cities. Institutional capital will return to this sector.
• Industrial real estate will continue to benefit from e-commerce growth in 2025 but?leasing activity will return to pre-pandemic levels. Vacancy will remain elevated in older properties as occupiers continue a flight to quality. The market remains tenant favorable but will tighten toward year-end.
• After a strong and sustained surge in multifamily completions over the past two years,?vacancy will edge down?in 2025 due to robust tenant demand. Economic growth will support household formation but the still-high cost of home ownership will drive demand for apartments.
• Artificial intelligence, cloud computing and the digital economy?will drive extraordinary growth in the data center market. Demand for power will further strain the U.S. grid but will not hold back development, with nuclear power starting to play a more central role.

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Debt Market Sentiment

With CBRE's nationwide?proprietary data sharing system we are able to keep?a pulse on the everchanging debt market.

Fed Watch: Headline and core CPI rose 0.3% in November as the Fed weighs how quickly to press ahead with cutting interest rates.?“We can afford to be a little more cautious as we try to find neutral,” Powell said at a New York Times event last week.

Investors odds of a quarter-point rate cut next week shot up to 99.9% after the inflation report, up from 86.1% Wednesday morning.?While next week’s rate cut is fully priced in, the market seems pretty comfortable with the prospect of a Fed going on pause early next year. Swaps traders are betting on more than 80bps of easing over the next 12 months, leaving the Fed Funds terminal rate in the ?context of ~3.5% to 4%.?Odds off a rate cut from the FOMC can be tracked on the?CME Fedwatch Tool.?

Life Companies: Allocations for the end of the year are looking modest as they focus on money in 2025. Corporate bond spreads (the baseline for LifeCo pricing of alternative investments) have been stable. We are seeing quotes?rates between 5.55% to 6.45%?for 65% leverage or less. Life Company?spreads are around 140-225bps depending on deal size, profile and leverage. Most are still 60% or less for best pricing in the low 5% range.??

Banks:?The normalization of the yield curve will continue to drive more appetite for banks. We?are seeing?quotes in the 6.15-6.75% range?for deals with steady collections and a strong tenant mix. Banks on their fixed rate programs for core deals are 3, 5, and 7-year fixed rates with a step-down prepay. Floating rate options are around 275-350bps + SOFR.

Debt Funds:?are looking to be more active and our client have pursued debt fund money now that SOFR continues to drop. Leverage?is around 60-70% loan-to-cost with primary focus on stabilized debt yield and in-place cash flow or lease up deals for multifamily or industrial product types. You can expect to see spreads range between?265-400?bps?over?SOFR. On the multifamily side, many groups are actively pursuing preferred equity positions behind agency senior loans.?

CMBS:?prefer 10-year terms as 7- and 5-year terms are more difficult to price. The question remains around spreads: while it generally takes longer for the CMBS market and some of its participants to react, CMBS spread moves have been relatively contained over the past few days, on both new issue and secondary sides.?We have?seen?rates?around 6.50-7.50%?depending on lean size, quality, property type and debt yield. Loan terms are anywhere from 5- to 10-years, fixed rate, up to 75% LTV and often full term IO.?

Agencies:?Freddie Mac announced this week that they are dropping spreads by 10bps.?

Fannie Mae's new business volume through October is at $38.5B, compared to $45.7B last year, while Freddie Mac business volume is at $43.7B compared to $37.0B last year. Overall, Agency pricing is around?5.55-6.20%. Rate buydowns are becoming a more effective alternative for borrowers given the current environment driven by volatile benchmarks. With a buydown, rates can drop to as low as 5.25-5.65%.

Our team is here to help you navigate financing options and provide color on what we are seeing in today's market.

Historical Cap Pricing

The chart below illustrates how cap pricing has changed over the past 2 years.

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USD LIBOR and SOFR Forward Curves

Indicative Rate Cap Pricing for Agency ARMs

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