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Summary

Home sales are expected to increase by 1.5% – 3.7% in 2025, and the number of sales is expected to increase by nearly 20%. How are we going to add 12% more new construction (forecasts) when the most profitable building in 2025 will be replacing destroyed luxury homes vs building starter homes in South Florida and SoCal? Commercial real estate market is experiencing diverging trends, with the office sector facing significant challenges as evidenced by the CMBS delinquency rate for office properties reaching an all-time high of 11.01%, while the multifamily sector demonstrates resilience despite rising vacancy rates. Let’s dig in!

Key Takeaways

• Residential real estate market shows signs of recovery with home sales expected to increase by 1.5% in 2025, driven by slightly lower mortgage rates and an 11.7% uptick in existing for-sale inventory¹.
• Mortgage rates remain elevated at 6.93% for 30-year fixed loans as of January 9, 2025, but are projected to average 6.3% across 2025¹.
• Commercial real estate faces challenges, particularly in the office sector, with the CMBS delinquency rate for office properties reaching an all-time high of 11.01% in December 2024².
• Multifamily sector shows resilience despite supply challenges, with average vacancy rates edging up to 6.1% in Q4 2024, the highest level since 2011³.
• REITs gained 4.9% in 2024 despite December headwinds, with specialty REITs leading at a 35.9% total return for the year⁴.

Residential Real Estate Markets: A Glimmer of Hope Amidst Challenges

Housing Market Poised for Modest Growth in 2025

As we step into 2025, the residential real estate market is showing signs of resilience and potential growth, despite ongoing challenges. According to the latest projections, home sales are expected to increase by 1.5% this year, offering a glimmer of hope for both buyers and sellers who have been navigating a tumultuous market¹.

The anticipated growth is attributed to two key factors: slightly lower mortgage rates and a significant increase in existing for-sale inventory. The latter is projected to rise by 11.7% compared to the previous year, potentially easing the supply constraints that have been a hallmark of the market in recent years.

Price Growth Continues, But at a Moderated Pace

While the market shows signs of improvement, it’s important to note that home prices are set to continue their upward trajectory. Economists predict that home prices will increase throughout 2025 at a rate of 3.7%. This moderated growth, compared to the double-digit increases seen in recent years, may offer some relief to buyers while still providing equity gains for homeowners¹.

Regional Variations Paint a Diverse Picture

The housing market’s recovery is not uniform across the country. Certain regions are outperforming others:

• The South and West continue to lead in projected home prices and sales, with Texas, Florida, and Virginia topping the list.
• Colorado Springs, CO, is leading in existing-home sales count, with a 27.1% increase year-over-year.
• Miami, FL, and Virginia Beach, VA, follow closely with 24% and 23.4% increases, respectively⁵.

These regional disparities underscore the importance of local market knowledge for both buyers and sellers, as national trends may not accurately reflect conditions in specific areas.

Demographic Shifts Influence Buyer Profiles

An interesting trend emerging in the market is the changing demographic of homebuyers. The National Association of Realtors® 2024 Homebuyers and Sellers Report revealed that buyers over the past year tended to be older and wealthier than in previous years. The median age of homebuyers reached 56, a significant 7-year increase from 2023. This shift could have long-lasting implications for the types of homes in demand and the communities that see the most growth.

Mortgage Markets: Navigating High Rates and Economic Uncertainty

The mortgage market continues to be a critical factor in the overall health of the real estate sector. As of January 9, 2025, the 30-year fixed mortgage rate stood at 6.93%¹. While this represents a slight increase from the previous week, it’s important to note that rates have remained relatively stable in recent months.

Looking ahead, the 2025 housing forecast projects that mortgage rates will average 6.3% across 2025. This anticipated decrease, albeit modest, could potentially stimulate more activity in the housing market by improving affordability for some buyers¹.

Last Week from The Housing Agencies and Enterprise

• The Consumer Financial Protection Bureau (CFPB) finalized a rule to remove an estimated $49 billion in medical bills from the credit reports of about 15 million Americans, potentially increasing credit scores by an average of 20 points Consumer Financial Protection Bureau.
• The CFPB sued Experian for allegedly conducting sham investigations of credit report errors, highlighting ongoing concerns about the accuracy of consumer credit information Consumer Financial Protection Bureau.
• Freddie Mac reported that mortgage rates jumped to a six-month high of 6.93% for the average 30-year fixed home loan, indicating continued pressure on housing affordability Realtor.com.
• The Federal Reserve is facing a cooling job market and persistently high prices, with Chair Jerome Powell indicating a potential shift in focus from combating inflation to considering interest rate cuts AP News.
• Michael Barr, the top Federal Reserve bank regulator, announced his resignation amid scrutiny from GOP lawmakers, potentially impacting future banking regulations AP News.
• The Office of the Comptroller of the Currency (OCC) is discussing deposit insurance reform and domestic bank regulation, emphasizing the need for transparency and public confidence in the banking system ABA Banking Journal.Federal Reserve’s Influence and Market Expectations

Commercial Real Estate Markets: A Tale of Diverging Sectors

Office Sector Struggles Persist

The office sector continues to face significant headwinds as we move into 2025. The CMBS delinquency rate for office properties reached an all-time high of 11.01% in December 2024². This alarming figure reflects the ongoing challenges posed by remote work trends and changing corporate space needs.

Notable examples of distressed office properties include:

• The $1.08 billion 280 Park Avenue loan in New York City, which saw its collateral value slashed by nearly 50% in 2024.
• Declining occupancy rates across major office markets, with some properties reporting occupancy drops from 95% to 89% within a year.

Multifamily Sector Shows Resilience Amid Supply Challenges

In contrast to the office sector, the multifamily market has demonstrated greater resilience. The average vacancy rate for apartments edged up to 6.1% in Q4 2024, the highest level since 2011³. While this increase might seem concerning, it’s important to contextualize it within the broader market dynamics:

• The rise in vacancy rates is largely attributed to record-level inventory growth rather than a significant drop in demand.
• Asking rents have remained relatively stable year-over-year, indicating that landlords are maintaining pricing power despite increased competition.

Retail and Industrial Sectors: Mixed Performances

The retail and industrial sectors present a more nuanced picture:

• Retail: While challenges persist, there are signs of improvement in certain submarkets. Strip malls and neighborhood centers, in particular, have shown surprising resilience, with some investors seeing opportunity in these often-overlooked assets⁶.
• Industrial: The sector continues to benefit from strong e-commerce demand, though there are indications of potential oversupply in some markets. Investors are increasingly looking at niche segments like cold storage and last-mile distribution centers for opportunities.

Emerging Trends and Opportunities

As the commercial real estate landscape evolves, several trends are worth noting:

• Adaptive Reuse: The conversion of underperforming office buildings to residential or mixed-use properties is gaining traction in many urban markets.
• ESG Focus: Sustainability and wellness features are becoming increasingly important to tenants and investors alike, driving renovations and new development standards.
• Alternative Property Types: Sectors like life sciences, data centers, and self-storage are attracting more investor interest due to their perceived stability and growth potential.

CMBS and REIT Markets: Navigating Volatility and Seeking Opportunities

CMBS Market Faces Ongoing Challenges

The Commercial Mortgage-Backed Securities (CMBS) market continued to grapple with significant challenges in 2024, as evidenced by the rising delinquency rates across various property types. The overall CMBS Delinquency Rate climbed approximately 191 basis points throughout the year, reflecting the ongoing stress in the commercial real estate sector².

Key developments in the CMBS market include:

• Increased Special Servicing Activity: Many large loans, particularly in the office sector, have been transferred to special servicing due to imminent maturity defaults or declining property values.
• Loan Modifications on the Rise: Lenders and borrowers are increasingly negotiating loan modifications and extensions to avoid defaults, particularly for properties facing short-term challenges.
• Selective New Issuance: Despite the challenges, CMBS issuance surpassed $100 billion in 2024, nearly triple the volume from the previous year, indicating some renewed confidence in certain segments of the market.

REITs Demonstrate Resilience Amid Market Volatility

Real Estate Investment Trusts (REITs) showed surprising resilience in 2024, with the FTSE Nareit All Equity REITs Index posting a 4.9% gain for the year. However, this performance was tempered by significant headwinds in December, which saw the index decline by 8.0% for the month⁴.

Notable trends in the REIT market include:

• Sector Divergence: Specialty REITs led the pack with a total return of 35.9% for the year, followed by data centers at 25.2% and healthcare at 24.2%.
• Underperformers: Industrial REITs lagged the most in 2024, with a total return of -17.8%, followed by timberland at -16.3%.
• Dividend Yields Remain Attractive: As of December 31, 2024, the dividend yield on the FTSE Nareit All Equity REITs index was 3.96%, compared to 1.22% for the S&P 500, highlighting the income potential of REITs in a low-yield environment.

Looking Ahead: Opportunities and Risks

As we move into 2025, both the CMBS and REIT markets face a complex landscape of challenges and opportunities:

• Distressed Asset Opportunities: The rising number of distressed properties, particularly in the office sector, may create opportunities for investors with expertise in turnaround situations.
• Sector Rotation: Investors are likely to continue shifting allocations towards sectors with stronger fundamentals, such as multifamily, industrial, and niche property types like life sciences and data centers.
• Interest Rate Sensitivity: The performance of both CMBS and REITs will remain highly sensitive to interest rate movements and Federal Reserve policy decisions.
• Credit Quality Focus: In the CMBS market, there’s likely to be an increased emphasis on credit quality and underwriting standards, potentially leading to more conservative loan structures.
• ESG Integration: Environmental, Social, and Governance (ESG) factors are expected to play an increasingly important role in both CMBS underwriting and REIT investment strategies.

The Crystal Ball: What’s Next for Real Estate?

As we gaze into the real estate crystal ball for 2025, it’s clear that the market is at a pivotal juncture. The residential sector shows promising signs of recovery, with increased inventory and stabilizing prices potentially opening doors for both buyers and sellers. However, affordability remains a significant hurdle, and the path to a fully balanced market is likely to be gradual.

In the commercial realm, the divergence between struggling office properties and more resilient sectors like multifamily and industrial is likely to persist. This bifurcation presents both risks and opportunities for investors willing to navigate the complexities of each submarket.

Whether you’re a homebuyer, a commercial investor, or a market analyst, the key to success in 2025 will be to expect the unexpected and be prepared to seize opportunities as they arise.

References

¹ Realtor.com. “Mortgage Rates January 9, 2025.” Accessed January 13, 2025. ² Trepp. “CMBS Surveillance: Four Loans We Watched in 2024.” Accessed January 13, 2025. ³ Calculated Risk Blog. “Moody’s: Apartment Vacancy Rate Increased in Q4 2024.” Accessed January 13, 2025. ⁴ Nareit. “REITs Gain 4.9% in 2024 as December Headwinds Trim Earlier Gains.” Accessed January 13, 2025. ⁵ Forbes Advisor. “Housing Market Predictions for 2025.” Accessed January 13, 2025. ⁶ Business Insider. “Commercial Real Estate Investment Opportunity: Shopping Center and Strip Mall Trends in 2025.” Accessed January 13, 2025.