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Market Highlights

• Over the last four months of 2024, the Federal Reserve implemented a series of rate cuts totaling 1%, resulting in a current federal funds rate of 4.25-4.5%. Markets had priced in these cuts and commercial lending rates are slightly higher than one year ago.
• In December, the market added 256,000 new jobs, slightly above the average monthly gain of 251,000 over the past 12 months. Consequently, the unemployment rate remained relatively constant at 4.1%.
• Multifamily continued to show strength, with net absorption of over 550,000 units, over double that of the prior year. Elevated completions have driven vacancies higher and rent growth around 1% for the year. However, the pace of new deliveries is expected to slow, possibly putting upward pressure on rents.
• The retail sector remains tight, with demand still growing and net deliveries at 40% below the 10-year average, resulting in continued sub-5% vacancy.
• The national industrial sector has slowed, with rent growth down to 2.2% this year from 7.2% last year and vacancy increasing to 6.8%.

Data from National Association of Realtors

Looking ahead, while the Federal Reserve is expected to continue reducing its rates, uncertainty remains regarding how the new administration’s policies will impact the market in 2025.

The below table lays out the probabilities assigned to a given rate level at the Fed’s upcoming meetings. The cell in blue shows the highest probability outcome. Based on this analysis, more than half expect that the rate will be between 350 bps and 400 bps in one year (a .5% to 1% drop from current levels)

While national rent averages have seen little change, there has been a wide range of trends across individual markets

Cap rates remained largely steady year over year, with 10 to 20 bps increases in all sectors except office, which saw a 60 bps increase

Vacancy rates were consistent year over year across most asset classes, with 10 to 20 bps increases in all sectors except industrial, which saw an 80 bps increase

Loan delinquency rates remained low, with commercial delinquencies slightly increasing from 1.4% at the end of 2024 and 1.2% this time last year.

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