Following historic low investment sales activity in 2023 across all real estate asset classes, the pace increased this year and some are expressing guarded optimism that momentum will accelerate in 2025. Experts who participated in a recent NAIOP-MD roundtable agree that lower interest rates have helped spur activity, encouraged new buyers to participate, and finally put an end to the inverted yield curve. John Black, President, MacKenzie Capital; Jonathan Carpenter, Executive Managing Director, Cushman & Wakefield; and Christine Espenshade, Vice Chairman, Multifamily Capital Markets, Newmark offered the following insights and perspectives.
(Left to right) Christine Espenshade, Vice Chairman, Multifamily Capital Markets, Newmark; Jonathan Carpenter, Executive Managing Director, Cushman & Wakefield and John Black, President, MacKenzie Capital.
Multifamily no longer the “belle of the ball”
Jonathan: Anything associated with or adjacent to industrial, including light industrial, distribution, small bay and even Industrial Outdoor Storage (IOS) has seen the most activity. I will add data centers to the mix as well, especially in the DC and Northern Virginia area. It is just a fact that all the industrial-zoned land in that region currently has a higher and better use containing a data center, although adequate power remains an issue. Clearly, the office sector is the least attractive asset class and we are even starting to see certain commercial office buildings and business parks being sold, demolished, and replaced with multifamily units, townhomes, and industrial space.
John: I agree that IOS remains extremely hot, and many of our brokers are making a good living trading these down-and-dirty sites. It is no longer the major food groups attracting investor attention. We have seen the recent popularity of product with a residential orientation, including build to rent, residential lot development and also non-traditional uses such as J-1 housing and student housing. The self-storage sector has also been popular. As always, building location means everything, with certain pockets performing extremely well and others generating extremely low investor interest.
Christine: Over the last 10 years multifamily has been where everyone wants to put their money. You could do no wrong and this asset class was “the belle of the ball.” However, we now see the popularity of various asset classes in this order: retail, data centers, industrial, then multifamily. Multifamily has fallen down the list, and though build to rent product is popular, we view this as a Sun Belt phenomenon with Mid-Atlantic land prices remaining too high for BTR development. Activity is also picking up in the student and affordable housing sectors, and across the board, we are seeing increased buyer activity among institutional investors.
When to expect normal activity
Jonathan: 2021 was a record year in industrial sales activity. 2022 and 2023 were impacted by periods of increased volatility due to inflation and interest rate fluctuations. Sales were down approximately 50 percent during that period. 2024 was a “pick-up” year — we have entered a rate reduction environment and buyers are proceeding with discernible confidence and returning to the product type they prefer best: industrial. The big open-ended funds remained on the sidelines for the past several years, but we see them returning to the space in 2025, and those are the players that drive the volume.
John: There will be a strong push to complete bridge loans before year-end and 2025 in response to maturity capitulation occurring with low-interest rate debt coming due in the current higher rate environment. Many owners will have to adjust to the new normal with respect to interest rates and proceeds.2023 was one of the worst years ever for investment sales in my 40-year career. The development and financing world basically stopped due to the precipitous rise in interest rates. Relatively speaking we currently are as busy as we have ever been because of the need to resize and recapitalize with a new capital stack.
Christine: Investment sales activity in the multifamily sector declined approximately 90 percent in 2023. Things are better this year, with activity doubling, but we need to keep in mind that we are coming off a period with record low sales volume. With the 10-year treasury now at approximately 4+ percent, we expect things to remain steady despite any upcoming cuts. That said, we see activity returning to normal and expect overall sales volume to pick up further next year. One interesting phenomenon in the Mid-Atlantic region is that there is very little floating rate debt in the multifamily market and very few loan maturities. Owners are sitting on their deals for a lot longer as it currently makes little sense to sell. We are also seeing some multifamily developers moving into alternative sectors such as industrial, data center, and cold storage development.
Buying and refinancing opportunities
Jonathan: My crystal ball broke 10 years ago, but you cannot be content with the Fed raising interest rates over a two-year period to aggressively slow the economy down without seeing repercussions. We have seen a slowdown and moderation of industrial leasing activity within the region and around the country as the market returns to normalcy after the spike in leasing due to Covid and the acceleration of online purchasing. The commercial office market has witnessed a tremendous amount of negative absorption due to corporate space givebacks and that will continue to play out as leases expire in 2025 and 2026. We are nearing a new cliff of industrial supply coming on-line and see 2026 as the time for market healing. Industrial vacancy rates have doubled from record low 3 to 4 percent figures and I think the economy has achieved the soft landing the Fed was looking for. No one wants to see a repeat of 2008 and 2009.
John: The current market opportunities are primarily finance driven. Loans closed years ago at historically low rates are maturing and now call for recapitalization and resizing. The higher first mortgage interest rates and more conservative underwriting lower supportable loan amounts and the need for additional capital in the form of preferred equity, mezz debt, or JV equity. There is a lot of capital in the market looking to fill this gap. Lower rates in 2025 will help borrowers with pending maturities.
Christine: There is still ample capital in the market to invest in commercial real estate. On its recent earnings call, investment management company Blackstone announced that it has $55 billion worth of dry power to deploy in CRE. Overall multifamily fundamentals remain quite strong. Properties in the Mid-Atlantic have high occupancies and are registering 3 to 4 percent annual rent growth. New supply is significantly down and we now talk about supply in the hundreds rather than the thousands of units. As an example, in Baltimore County there is only one multifamily project under construction, and another broke ground recently in Baltimore City. Construction financing is expensive and recent sale prices have not supported new development, which will further generate high occupancies and outsized rent growth in the region.
Interest rate cuts on the horizon?
Jonathan: More short-term rate cuts may be on the way, however long-term borrowing costs drive investors. We believe rates will remain in the 4 to 4.25 percent range which brings stability to the acquisition market within the industrial sector. Within the office sector, sophisticated, value-add buyers are slowing getting back into the market looking for opportunistic office acquisitions, while others are waiting for the bottom. There is still quite a bit of risk in the office market and a feeling the fundamentals may get worse before they get better.
John: Maybe this is what a soft landing is like, but it feels a bit bumpy. The recent strong employment numbers might mean the Fed will delay or be slower in lowering interest rates by another 25 basis points. We recently exited the longest inverted yield curve in our economy’s history, and hopefully moving towards a more normalized yield curve with lower short-term rates. Except for the commercial office sector, we are slowly getting back into a more normalized environment.
Christine: Two more interest rate cuts may be on the way, but we believe that will have minimal impact on long-term rates. The economy seems strong, with unemployment at 4 percent and inflation hovering at 2 percent, so the rate cuts may be pushed into next year. More importantly, institutional capital has returned to the market and REITs have also been more active. With the return of these buyers, we expect an overall increase in sales activity which will generate higher demand and better pricing.