Sentiment Points to Recovery – Dec. 23, 2024

Amid an unusually volatile post-election period, commercial real estate industry sentiment has tended toward the positive when considering the year ahead. As a case in point, real estate consulting firm RCLCO said its sentiment index has moved into positive territory for the first time since a short-lived recovery period in 2021. 

Among the key takeaways from the latest survey, released last week: 

• The RCLCO Current Real Estate Market Index (RMI) has shown strong improvement over the past six months, ending at 65 in the most recent survey, representing an increase of more than 25 points since mid-year. The index has now moved solidly into recovery territory, with an RMI above 60 typically indicative of positive or improving market conditions. 

• The survey forecasts good times ahead. A large share of respondents predict that real estate markets will continue to improve over the next six to 12 months. The Future RMI is predicted to increase to 82 over the next 12 months, indicating a return to expansion within the next year. 

• Looking over the next 12 months, survey respondents expect most real estate sectors to be in recovery or early stable phases. Some niche sectors – such as self-storage, grocery/necessity retail, and industrial – are anticipated to continue to show resilience after avoiding downturn conditions this cycle. 

• RCLCO’s mid-year survey respondents predicted a Trump win, and so this came to pass. Fifty-four percent of respondents believe a Trump presidency and a Republican-controlled Congress will have a positive impact on the real estate industry. Twenty-one percent believe the impact will be neutral, 17% believe it will be negative and the remaining 8% are unsure. 

Partner Valuation Advisors senior managing director Eric Enloe provided further insights into the industry’s thinking on the election results. “Overall, a new Presidential administration is being viewed in the markets as a positive,” Enloe said. “Clearly, President Trump has experience in the commercial real estate business. He understands the dynamics of the business. So, I do think overall, the net effect of his policies will promote demand for real estate in this country.” 

He continued, “There’s certainly a little bit of concern about what impact the tariffs could have when you get into the industrial space and what that could do to retailers and what that could do from a commerce perspective. I think that will also have the potential impact of encouraging additional industrial development in the U.S. That said, all companies would rather have their manufacturing in the U.S., but it is a function of production cost and having more cost-effective options abroad. It will be very interesting to see how this plays out.”  

The President-elect’s margin of victory was among the narrowest in the past century, and many in the industry believed the outcome could have gone either way—and prepared accordingly. “Commercial real estate investors I talk to don’t generally have strong feelings about either political party or that one that would be better or worse for them,” said Enloe. “The biggest sentiment I heard was investors simply wanted to know who the President was going to be so they could make their own investment decisions.  

“On the margin, investors may have believed President Trump would be slightly better for business, but it was more about quickly putting the uncertainty of who was going to be running the country behind us,” he continued. “Investors were prepared for either candidate to win, and since candidates don’t typically move the needle tremendously on commercial real estate values, it was more about knowing which party was in power so big institutional investors could create their business plan and execute their investment thesis.” 

The cost of capital naturally is a factor to consider when executing on a business plan. Last week saw the Federal Reserve implement another quarter-point cut in the federal funds rate, a widely expected move and a further step in the right direction. However, Fed Chair Jerome Powell indicated that the pace of rate reductions will slow next year, and now the industry has its eyes on the central bank’s direction in 2025. 

At Altus Group, director of research Omar Eltorai observed, “While the Fed’s pace of rate cuts may frustrate many, particularly those in industries that rely heavily on debt and capital market financing, like commercial real estate, there is rationale to the approach. Sometimes, it might seem like the Fed is taking too long to make a move, but it is because [Federal Open Market Committee] members are trying to ensure they do not make any counterproductive or unsubstantiated decisions.” 

Looking ahead, Eltorai continued, “Although monetary easing is not immediately felt by CRE investors, CRE is not an ‘immediate’ asset class, and investors are already considering and planning for the years to come and what the market environment may look like then. While sentiment seems to have surged across many aspects of capital markets and the economy, the CRE markets are in the process of thawing – and we should get a better sense of how quickly they will warm over the next year.” 

From all of us at Connect CRE, best wishes for dealmaking in 2025. We’ll be back with regular news on Jan. 3.