Market Matters

May 2025  

QUICK BITES  

Adjust Scenario Probabilities on the Daily

• Formulating Strategy: Contextualizing and planning around a set of scenarios or outcomes is key. Our base case remains Stagflation, with an (unofficial) 50%-60% probability ascribed. Under this scenario, the Fed is positioned to cut policy rates slightly by year-end ’25; CRE demand formation slows as business investment pulls back all as the consumer hunkers down. While not an outright recession, Stagflation will feel uncomfortable, precarious, and choppy. Decision-making across both the CRE fundamentals and capital markets environment will slow amid heightened uncertainty. This cyclical downturn period is expected to curb, but not entirely derail the momentum for CRE capital markets that was forming in Q1 ’25.
• Tariff Trends: Under the post-Geneva tariff policy landscape, the effective tariff rate is going to trend lower than previously expected (i.e. not in the low 20%’s), but still higher than it was pre-Trump 2.0 (i.e. not 2%-3%); prevailing estimates hover around an effective tariff rate in the low teens (around 13%).
• Recession Outlook: Against this new tariff policy backdrop, the probability of a recession is somewhat mitigated, thereby increasing the base case probability for Stagflation. A more positive, upside scenario could emerge if the Trump administration scales back tariffs and de-escalates trade tensions.
• U.S. / China Trade Deal Impact: The U.S. / China trade deal does more towards averting a more negative outcome than it does towards ensuring a truly positive outcome. Had both sides not come to the scale of the agreement they did, the global economy was most certainly headed for recession. Global trade is still stifled, though not entirely embargoed as it was under at 145% China tariff policy.
• Dual Mandate Tensions: The Fed faces conflicting policy pressures. The labor market is easing and inflation is facing mounting pressure from intrinsically inflationary trade policies; neither side of the mandate is flashing alarms just yet, but risks to both bear watching. Powell’s patience, so far, is proving warranted, as the latest U.S./China trade deal loosened financial market conditions, the latter of which feeds directly into broader economic growth and inflation implications. While downside risks and recession risks remain elevated, the Fed has room to cut rates aggressively should growth falter. Powell has emphasized their well-positioned stance, which implies a bias towards patience as they assess incoming data.
• Hard-Data Waiting Game: Much of the economic data released in May (which largely covered the month of April) were recorded too early to capture the impact of tariff policies on the labor markets, the consumer, inflation, and by extension the economy writ-large. However, one of the most real-time indicators of economic sentiment, crude oil prices, have yet to make a meaningful recovery from the 20% decline recorded in the week following April 2nd, reflecting continued caution around global growth prospects.
• Consumers Remain Downbeat on Their Present Circumstances and Outlook, But Their Balance Sheets Tell Another Story. April’s Conference Board’s Consumer Sentiment reading revealed that overall consumer confidence has fallen by 19.3 points over the last three months, just shy of the historically recognized 20-point threshold that predicts a recession. Consumer Expectations for the future are also very weak, though measures of Current Conditions are a bit better, a dynamic which helps to explain why real retail spending is still holding up so far. Household debt obligations remain low relative to prior cycles (trending at around 11% as a percent of disposable income), bolstered by real wage gains registered during the post-pandemic years. Equity market and home equity gains have also generated more resilient household balance sheets.

KEY THEMES

• Credit Market Stabilization: Investment grade (“IG”) corporate bonds jumped 30-40 bps in the weeks following the April 2nd reciprocal tariff announcements; some of this was driven by rising risk premia as concerns over economic growth mounted, while a portion was also driven by a bit of contagion as longer-dated Treasury markets spiked causing liquidity concerns and confusion among bond market participants. Yet, in the weeks following the April 9th reciprocal tariff pause announcement, and particularly following the U.S./China trade deal, investment grade corporate bond markets have settled down, stabilizing by between 20-40 bps, for both Baa and BBB bonds. Even at the peak, the risk spread expansion was relatively tame (and orderly), and IG credit spreads remain below historic averages.
• Re-engagement throughout CRE Debt Markets: It’s natural to see the pause that we saw in the CRE debt markets following Liberation Day; spreads widened by anywhere between 20-50 bps, all as conviction and decisiveness prompted many to halt as the market digested the whipsaw occurring in the equity markets, financial markets and political policy landscape more broadly. Yet, this was clearly temporary – debt spreads have settled back down. While spreads widened temporarily, it’s also important to appreciate where they moved from; AAA spreads over swaps were trending at 94 bps in March ’25, compared to 95 bps in March ’22, well below the cyclical highs of 110s in July ’24. They peaked mid-April around 109 bps, but have since settled back in to the high 90’s/low 100’s. Because spreads are moving off a low base, these episodic shifts will feel dramatic, but the imbalance of significant debt capital to deploy relative to the shortage of deals on the market today continues to drive more competitive and compelling terms from lenders.

• Traction in CRE Debt Markets Leading CRE Equity Markets: Despite being subject to base rate volatility and risk spread expansion (post April 2nd), CRE debt costs are still trending 35-50 bps lower than the October 2023 peak, and debt availability has grown as the lending landscape has diversified across lender types. Financing is available, especially for high quality assets with durable income streams.
• Foundations for CRE Equity Market Recovery: CRE investors are no longer waiting for benchmark interest rates (on both the short- and long-end of the yield curve) to drop in the near term like they were back in the second half of last year. This fundamental change in expectations allows traction to form as investors refocus on the basics of deal and financing structure and on longer-term investment strategy rather than on hyper-focusing on the movements within the short end of the yield curve. We covered our views on the U.S. 10Y Treasury and the long end of the yield curve extensively in last month’s Market Matters.
• Generation Reset: NCREIF NPI cumulative appreciation returns are down a cumulative 18% from their peak, with a positive quarterly return for NCREIF’s All Property NPI registered for the first time in 2.5 years. Returns are stabilizing near trough, so if you’re really set on timing the bottom, institutional valuation benchmarks are signaling impending inflection.
• Contrarian Views on “Why Now”: For now, the investment landscape from a buyer type perspective is still relatively thin. Institutional buyers are showing an early indication of re-entering (their volumes increased by 70% y/y in 2024), but Private buyers are still comprising 56% of the market. Looking at the breadth of the buyer pool last year also suggests that this is a time to lean in as a contrarian; last year, there were roughly 8,200 unique buyers, a figure which was in line with levels we saw in 2016-2017; this measure is down 35% from the peak and about 10% below 2019 levels as well. The pace of y/y growth has inflected, with buyer pools up 1% from a year ago, which typically occurs as capital markets begin to recover. In 2002, for example, a similarly marginal improvement occurred (with a y/y increase of around 10%), meanwhile, the inflection in the unique buyer pool expanded by roughly 30% y/y in 2020 (though it was off more than 55% from peak at the time). 

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DIVING DEEPER

Shift to Safer Havens

In January’s Market Matters edition, we noted the surge in fundraising for closed-end, core and core-plus strategies,  underway as investors gravitated more towards lower-risk/return opportunities.

This type of shift is cyclically common coming out of periods of economic disruption or liquidity crunches as diversified investors begin to reaccelerate CRE purchases at scale. The same pattern emerged in 2010 coming out of the Great Financial Crisis. A similar trend is now underway that began to take shape in 2024 as the Federal Reserve reached the end of its interest rate hiking cycle, clearing the way for investment to re-accelerate into more debt-heavy asset classes including CRE.

Since January, another sign has emerged that confirms rising interest in more conservative CRE investment strategies: investors are gravitating towards safe-haven property types with less cyclical, necessity-oriented demand drivers.

This trend is most visible in the year-to-date changes of publicly traded REITs’ implied cap rates, which offer the added benefit of updating in real time as stock market investors react to daily economic headlines and earnings reports.

So far in 2025, implied cap rates have compressed for REITs owning predominantly telecommunications towers, health care properties, and single-family rentals. Each of these sectors are known as “niche” property types within the CRE industry due largely to their smaller overall market capitalization.  However, leasing within these niche sectors is also driven by secular trends such as the aging of the U.S. population (in the case of health care) and the shortage of affordable single-family housing (in the case of single-family rental). This makes them less sensitive to business cycle headwinds and increasingly popular among institutional investors seeking to diversify their CRE portfolios.

Among the larger, more traditional CRE property types, implied cap rates of apartment REITs have held up best, rising by only 5 basis points so far in 2025. In contrast, implied cap rates for office and lodging REITs have risen by 24 and 56 basis points, respectively.

The diverging performance between these sectors likely reflects investors’ concerns over risks of a recession or slowing economic growth. On average, Apartment notably outperformed the other major property types during and in the immediate aftermath of the past three pre-pandemic recessions. During the same periods, the Office and Hospitality sectors underperformed.

April 2025  

QUICK BITES  

We Held a Webinar on the Implications of Policy

• Watch the replay of our Think Tank’s webinar held on April 10th or review our key takeaways to see how we are contextualizing, synthesizing and formulating an outlook for CRE property in this Trump 2.0 era. We touch on everything from Tariffs, Immigration, DOGE, privatizing GSE’s, as well as share our assumptions for establishing a base case outlook and establishing what it all means for both CRE fundamentals and CRE capital markets.
• Watch the replay
• Review the key takeaways

KEY THEMES

Financial Market Volatility Casts Shadow on Capital Markets Recovery 

• Fluid Market Conditions: The financial markets are in an acute period of uncertainty and instability. Higher frequency financial market indicators point to widening credit spreads and tightening financial conditions. Investment Grade BBB credit spreads widened by around 25-30 bps following Liberation Day, all as issuance came to a near 3-day halt as issuers and credit investors took pause. While yields and spreads recovered some lost ground following the announcement of the 90 Day Reciprocal Tariff pause (i.e. Blink Wednesday), residual uncertainty clearly remains high.
• Foretelling a Focus on Quality: Spread differentials between IG corporate bond yields and HY/Junk corporate bond yields have also widened (trending back near historic averages), which points to an ongoing flight to quality in the corporate bond markets whereby, investors are leaning further into credit quality and relative stability.

• Bifurcated Investor Preferences Emerge as Risk Appetites Adjust: A similar theme is surely to unfold throughout the CRE debt/capital markets over the course of the next few weeks and months while policy and the macroeconomic outlook remain uncertain. In the near-term, the CRE investment market is likely to shift into a bifurcated landscape, where underlying demand for quality and resiliency is strong.
• "Two Steps Forward, One Step Back" From the Frontlines of the Debt Market: Our Equity Debt and Structured Finance team indicate that the CRE debt markets took pause over the course of the week, which alongside a broader widening in risk premium, prompted a widening in CRE debt spreads of anywhere between 20 bps – 50 bps. Mirroring the pause in issuance in the corporate bond markets, new CMBS issuance came to a halt following Liberation Day as many borrowers decided to take a moment of pause before moving ahead.
• Portfolio Balance In Flux: The possible return of a denominator effect arising from the sharp contraction in broader equities market could force a rebalancing in institutional portfolio allocations in the near-term, which could in theory, place renewed pressure on fund flows. That said, it is important to recognize that pressure on fund flows has eased substantially over the last six months as institutional valuation write-downs have reduced investors’ desire to exit ahead of anticipated portfolio declines. One could argue that the anticipation for the valuation reset drove a sizable portion of redemption requests, perhaps eclipsing the impact that the denominator effect had on fund flows over the last several years. Leading into this new year, institutional portfolios were widely underallocated to CRE relative to their targets given that so many had taken to the sidelines as the rate hiking cycle took hold. This renewed period of volatility is likely to curb some of the momentum in the capital flows recovery, but we also offer a few counter-arguments that could serve to drive additional capital towards CRE in this environment next.   
• In Wake of Equity Sell-Off, Portfolio Evolution Could Accelerate and Benefit CRE: Institutional investors have been actively recalibrating their portfolios away from more legacy or traditional 60/40 splits towards a balance that allows for greater allocations to private assets like private credit, real estate and infrastructure. The next-generation portfolio balance is likely to resemble something closer to a 50/30/20 split between stocks, bonds and private assets. This recalibration towards private assets has been well publicized despite the fact that equity market returns have outperformed CRE (Chart 1 shows rolling 7-year cumulative returns for both the S&P 500 and the NCREIF NPI Index, where returns for equities have clearly been higher). As we look to the most recent equity market sell-off, some institutional investors are likely to hone their allocations even further towards stable, income producing alternatives like CRE.
• Beta and Risk Management Move to the Front of the Line: Chart 1 emphasizes another concept that is likely to drive capital flows further into CRE – and that is stability and diversification. To the former, the standard deviation of private real estate returns is substantially lower (less than half) than the equities market. To the latter, the correlation between the two (on a 7-year rolling basis) is low. Times of volatility tend to accentuate appetites for both stability and diversification.

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DIVING DEEPER

The Big Kahuna

The fact that the latest equity market sell-off has not generated a congruent flight-to-quality contraction in longer-dated Treasuries is perhaps one of the more vexing uncertainties bubbling up in the capital markets this past week. So, why is this happening and will it continue?

Indeed, there are a handful of dynamics contributing to upward pressure on Treasuries.

Let’s start with the “basis trade,” which at its core, gets to investors’ need and/or desire for liquidity and cash reserves. Anecdotally, traditional equity investors have echoed that sentiment, so it would follow that bond investors and hedge funds would feel similar pressure as acute market stress set in. While Treasuries are a liquid instrument, they are not cash; in the case of a basis trade (estimated at $800 billion - $1 trillion outstanding), cash is naturally needed to fulfill margin calls, which require access to guaranteed liquidity.

• The latest bond market sell-off naturally introduces the broader topic of financial market stability, which is of critical importance and top-of-mind for Federal Reserve officials, economists, banking sector leaders and academics alike. Indeed, the Federal Reserve has demonstrated historic precedence towards ensuring that the bond markets do not seize up under a liquidity squeeze in the future; they’ve acted in the past by purchasing $1.6 trillion in U.S. Treasuries to provide stability to the financial system during the pandemic. In addition to Federal Reserve intervention, U.S. Treasury Secretary Scott Bessent, Fed Chairman Jerome Powell, and many other experts and leadership throughout the banking system are actively evaluating the regulatory constraints and capital requirements that currently define the extent to which banks and other broker-dealers can lend to the broader financial system during periods of market stress. Whether or not adjustments to banking regulations are made remains an unknown, but episodes like last week are likely going to bring the topic of banking regulation to the forefront and are likely to expedite conversations and decisions among the administration, regulators and the industry at large.

Next up would be the more fundamental inflationary and uncertainty challenges that we’ve identified in prior editions that will naturally exert more upward pressure on longer-dated yields and the term premium. To that end, survey-based inflation expectations as measured by the University of Michigan spiked to levels not seen since June 1991; bond-implied 5-year breakeven inflation expectations, however, remain anchored.  The Fed is likely more attuned to the latter, which provides some comfort for the future easing path of monetary policy.

The next concept is a meaty one: it gets to questions surrounding whether the U.S. is losing its luster as a safe-haven investment destination.

• Systemically and in the long-run, we should emphasize that we don’t believe this to be the case. However, in the near-term, investors should plan and strategize around the fact that Treasuries are likely to experience upward pressure. If the viability of the Treasury market were in question entirely, we wouldn’t be seeing evidence of persistent demand from recent Treasury auctions (as was the case this week for both 10Y and 30Y USTs). Concerns over the U.S. fiscal situation and over the unpredictability of U.S. trade policies are more likely to act as whipsaw forces that place upward pressure on yields as opposed to undercut the demand for investment entirely; it’s perhaps a new risk premium attached to these instrument as opposed to a deterioration in demand for the segment altogether.  
• One further double-edge point to mention stems from a concept around timing: much of the Treasury market volatility over the last week has occurred overnight as foreign markets open and the U.S. sleeps (let’s hope). On one hand this implies that much of the sell-off is coming from Asian investors (see Chart 2, which shows that investors in these countries had already been reducing their Treasury holdings). And on the other hand, it highlights that the relative stability during the day proves out the relative demand for U.S. Treasuries around current pricing.

Ultimately, this period of uncertainty has the potential to shift investor appetites towards asset classes (like CRE) that offer stability, income preservation and durability. CRE offers a multitude of counter-cyclical and/or necessity-based strategies that could capture more investor interest; sectors and sub-types like healthcare, grocery-anchored retail, seniors housing and all forms of for-rent residential each provide investors with a unique set of relatively insulated, necessity-based sources of demand.

Beyond shifting preferences at the sector and sub-type level, strategies and conviction are also likely to be highly bifurcated with a scarcity premium placed on the-best-of-the-best assets. As appetites shift along the risk spectrum, we are likely going to see underwriting place greater emphasis on things like tenant credit quality, on longer-term weighted average lease terms and on quality of asset. Anyone looking to strategize within the near-term should recognize that those sectors, sub-types and deal profiles are still going to capture outsized investor and/or lender conviction when uncertainty is elevated. So, beyond the technical indicators and spread-relationships, it’s important to think about where an existing asset, business plan or strategy lies within the thematic spectrum and how that contextualizes with investment environment today.

QUICK BITES  

• The Macro Outlook: remains cautiously optimistic. Policies of the new administration add uncertainty and headwinds to growth prospects; however, these new policies are more likely to shift the pace and inner workings of economic growth rather than threaten or undermine it entirely. Economic growth is set to slow from the above-trend pace registered over the past few years, but a recession scenario is not currently outlined as our base case.
• Inflation: has been stuck hovering near 3%, above the Fed’s 2% target. Impending policy changes (particularly trade protectionism and immigration) add upward inflationary impulse to the outlook.
• Monetary Policy & the Dual Mandate: The Fed will remain patient. Ongoing rebalancing in the labor markets should allow for further easing in policy later in ‘25.
• Credit Spreads:  Financial market volatility is to be expected, and credit spread expansion is underway as markets react and digest. Credit spreads are still tighter than historical averages, which is a green shoot in one sense and a warning signal in another – further credit spread expansion (even just reversion to mean) would increase debt costs and dampen the capital markets recovery.

KEY THEMES

A New Cycle Is Upon Us

• Recalibration: The CRE capital markets are cyclically evolving and adapting to a normalized interest rate and yield environment. That adaptation and adjustment process has not been pleasant for valuations, nor has it been as swift as many would hope, but we are two years into the process, and market participants across the full spectrum of the capital and debt markets are finally recalibrating their strategies for this next investment cycle.
• Shifting tides, despite ongoing macroeconomic uncertainty: while it may feel counter-intuitive, we still expect the CRE capital markets recovery to progress (albeit gradually) despite the chaotic political policy landscape and decelerating macroeconomic backdrop. Check out Abby’s latest piece, titled “Tide is Turning: U.S. CRE Debt Markets are Re-Engaging” for a summary of key inflection points and forward-looking strategic implications.

• Perspective on what we’re recovering from to help justify where we’re headed: the required market adjustment to normalized interest rates caused the most recent monetary-policy-induced CRE capital markets downturn. Recovery from that recalibration process can (and will) unfold gradually even as we face a deceleration in economic growth. Now, if the economy were to dip into a recession (not our current base case), the capital markets recovery would stall out, but that again would be a cyclical dynamic that would simply be interrupting or delaying the recalibration process already underway. Indeed, some of the momentum felt in late ’24 has retreated as the Fed and the market-at-large adopt a bit more of a wait-and-see mode to allow the policies of the new Trump Administration to unfold. It is best to think of the near-term outlook as a gradual sequential shifting tide rather than a rushing current.

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DIVING DEEPER

Riding the Waves of Megatrends: Shaping the Future of Secular Growth

While the near- and medium-term outlook remain critical to asset management and investment strategy, it’s important not to get so swept up in the daily minutia of fluid economic policy, media, and financial markets that it becomes a complete distraction to the myriad of lasting themes that will transcend each subsequent political administration.

In addition to maintaining a high-frequency pulse on prevailing capital markets conditions, we are also keenly focused on the longer-term trends that will shape institutional portfolio strategy throughout the built environment in the years to come. Investment strategies are increasingly adopting a thematic approach, geared toward the secular forces reshaping demand-side tailwinds. These include aging demographic trends, evolving consumption patterns, shifting consumer behaviors, technological advancements, and changes in data storage and usage.

Below, we highlight a few key thematic megatrends that continue to build momentum and inspire confidence among investors across both traditional and emerging alternative CRE sectors:

• Aging Demographics: Consider the aging Baby Boomer generation. The fastest growing age cohort over the next decade will be seniors, and the U.S. population over 75 years old is projected to increase by over 33% by 2032 (see Chart 1, which follows the progression of population growth by year by age cohort over time). This aging cohort is fueling demand for senior housing across the continuum of care—independent living, assisted living, memory care, skilled nursing, hospice, etc. With pandemic-related disruptions fading, senior housing has recovered, and rent growth is gaining momentum. The sector faces more room to run, as well, as senior housing is set to experience surging demand over the next 20 years. By our estimates, the U.S. will need to add approximately 35,000 senior housing units annually through 2045—well ahead of the current pace of roughly 25,000 units.
  
  Medical outpatient buildings will be buoyed by the aging U.S. population as well, as over a third of all healthcare spending, including government and personal expenditures, is done on behalf of citizens over 65 years old. For investors with an understanding of the regulatory, operational, and development challenges in these spaces, the opportunities are substantial.
  
  
• Lack of Housing Affordability: As Boomers age, the largest generation in the U.S. is now Millennials, who are aging into their 40s. This generation is entering their prime homeownership years (Chart 2), but single-family affordability constraints continue to challenge their ability to buy, thereby supporting the case for traditional multifamily demand in the chapter ahead. In addition to traditional Multifamily, Build-to-Rent (BTR) housing is helping to fill this gap by providing single-family-style homes with modern amenities, along with the convenience of renting.
  
  The 40- to 49-year-old age cohort population is expected to grow by more than 10% in the U.S. this decade, making it the fastest-growing age group outside of the 65+ category. These households are gravitating towards both traditional Multifamily and BTR properties. Institutional interest in this asset class is growing, though opportunities for BTR properties will largely come from new development, creating unique opportunities—and challenges—for investors.
  
  
• Cloud Computing, Technology Adoption & Advancement: The explosion of cloud computing, artificial intelligence (AI), and digital tools has sparked near-insatiable demand for high-quality data centers. With AI’s growing influence in the data center industry, global AI colocation demand is expected to increase from $2.2B in 2024 to $36.7B in 2029. Undersupply conditions for existing data centers have sent hyperscalers and colocation providers toward new development which has caused data center construction pipelines to explode.
  
  Investors seeking exposure to the digital economy are increasingly allocating capital the Data Center alternative sector, even as the sector wrestles with power, infrastructure, and permitting challenges. Capturing this momentum in the Data Center segment means not only understanding the geographies driving demand—such as the established U.S. hubs of Northern Virginia, Dallas, and the Pacific Northwest—but also recognizing the rise of emerging markets across the heartland. Equally important is a deep understanding of the technical complexities that define this highly specialized asset class.

Investor preferences are shifting to align with the resilience, counter-cyclicality, and long-term growth prospects offered from secular tailwinds and through alternative/niche sectors.

• Open-End Diversified Core (ODCE) fund allocations toward alternative sectors have grown steadily, rising to 9.1% in 2024—a dramatic increase from just 2.7% five years prior. This consistent shift toward alternative sectors reflects not only their resilience during market downturns but also their alignment with long-term structural trends.
• Fundraising for dedicated niche-focused vehicles has grown 87% in the post-pandemic era (2020–2024) compared to pre-pandemic years (2017-2019). However, it’s important to note that a large portion of alternative sector investment is channeled through Diversified funds as well, which have captured upwards of 70% of fundraising since 2020, as opposed to specifically mandated, sector-defined funds.
• Meanwhile, if we look beyond capital flows and focus on transaction activity, niche properties account for approximately 22% of all transaction volumes, a meaningful climb from the long-run average and evidence of their growing prominence.

Apart from the choppiness of the near-term outlook, the CRE capital markets are entering a dynamic new chapter, defined by evolution and recalibration. The near-term outlook is increasingly uncertain, and unfolding economic policies have the potential to exert upward pressure on inflation, complicating the Fed’s job. Yet, the economy and CRE has proven its resilience to a broad spectrum of political administrations and economic policies in the past. It is important to steer through the daily minutia and whipsaw of the financial and political policy environment and remain focused on the tailwinds underlying aging demographics, shifting consumer preferences, and technology adoption that will continue to reshape business, consumer, occupier, and investor demand. Focusing on the themes that will transcend cycles and drive evolution throughout the built environment will serve investors over the long run.

QUICK BITES  

• Powell’s testimony to Congress made it clear the Fed is in “wait-and-see mode”, and that is ‘okay’ for now: While we have made significant progress, inflation is stuck stubbornly just slightly above the Fed’s target (with CPI trending near 3% y/y and PCE trending near 2.5% y/y, and the target being 2%). Powell also acknowledged the robustness of the labor market, which together with higher than desired inflation, is further reinforcing the Fed’s patient stance.
• Multifaceted indicators to watch: All eyes will remain on the sensitivity of inflation expectations, which have been rising across both the consumer and financial market fronts as participants digest the ramifications of economic (primarily trade) policy shifts. Further de-anchoring in consumer, business, and bond market inflation expectations can alter purchasing, pricing and investor behavior in a multifaceted, complex manner. The Fed needs more time to assess how unfolding trade policies will flow through to the economy in both growth-, inflation- and inflation expectation-effects.
• New capital markets horizons: the Fed is in “hold mode”, and it’s time to place less hyper-focus on the near-term prospects for the short-end of the yield curve: The Fed remains data-dependent, but they also remain focused on the bigger picture, not just one month’s CPI report or a handful of very fluid economic policy announcements (cough tariffs cough). We knew the road to target inflation would be stubborn, and we knew that macroeconomic growth was moderating from an above-trend pace bolstered by supply-side fueled productivity gains. For the remainder of 2025, it is best to calibrate investment strategy to the reality that the Fed is simply in no hurry to cut short-term policy rates. The long end of the curve will also face upward pressure, trending in the mid 4%’s, as the market digests the implications of new economic policies on growth, inflation, and the term premium. Whipsaw of the financial markets will persist, and, at the risk of sounding cliché, it is best to get comfortable…being uncomfortable; paralysis is not a strategy when the market continues to focus on gradually recycling and redeploying debt and equity capital.
• Don’t overlook the positive implications of a tight labor market and healthy consumer for CRE: While it would be disingenuous not to acknowledge the upside risks to inflation, it would be equally partial to overlook the fact that the Fed feels justified in holding their policy stance given the underlying resilience of the economy and labor market. Indeed, many of the new administration’s economic policies will also have a stimulus growth effect on businesses and the consumer. If the Fed was concerned about growth turning significantly below potential, they would choose to ease policy further and sooner.
• We remain committed to rigorous research, not speculation and conjecture: our Think Tank teams is focused on carefully framing and studying the potential longer-term implications of evolving economic policy for to the CRE industry. We plan on releasing a “First 100 Days” research piece this spring, which will take a comprehensive look at implications for CRE.

KEY THEMES

• A new cycle is upon us, and the debt markets have meaningfully re-engaged. Featured as part of our new "Tide Is Turning" series, my latest piece “U.S. Debt Markets are Re-Engaging” takes a closer look at key inflections underway throughout the financial markets and CRE debt markets. Take a look.
• The early stages of this new cycle will be incremental in nature: Despite hyper-sensitive financial market conditions, investors are 2+ years into accepting and acclimating to normalized interest rates; focus has shifted towards selective action with a growing desire to place capital across both debt and equity. The CRE capital markets will continue to sequentially improve on the back of a broadening debt market and an adjusting equity side. Institutional capital flows are also gradually starting to return as cumulative adjustments to valuation have unfolded, which will continue to help drive additional buyer activity.

• The macro-outlook is not without uncertainty, but the stage remains set for a continued CRE recovery: Risks of recession has receded dramatically (trending near historic norms). Even in the face of headwinds, economic growth is expected to trend above potential next year, which will support CRE demand. Accordingly, we expect to see inflecting NOI growth and improving conditions for investors and lenders over the course of the next year. As always, the outlook is not without uncertainty and downside risk – most notably related to the new incoming Republican administration, to geopolitical and trade tensions, and of course to any monetary policy errors that arise as central bankers across the globe navigate their easing cycles. Uncertainty and volatility will remain part of reality next year, but CRE is no stranger to uncertainty, and the sector has proven its ability to adapt to a broad range of macroeconomic and political conditions.
• Risk mitigation is key: This next chapter in CRE capital markets will be characterized by cautious action, diversification, and risk mitigation. Uncertainty around the direction of economic policy and monetary policy adds natural volatility to the financial markets while unsettling consumer, business, and investor confidence. Less confidence translates to more caution. Yet, caution is not necessarily a negative condition, and it is not necessarily an uncommon condition for the early stages of a new cycle. Conviction can still be formed amid uncertainty, however, more focus will be placed on income preservation, counter-cyclicality and risk management or mitigation.

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Spotting Signs of Recovery & Busting Myths

Risk mitigation strategies imply that counter-cyclical, necessity-based sectors like Multifamily are likely to witness outsized attention as investors are drawn to the sector’s more insulated demand-side foundation.

Accordingly, I wanted to highlight some of the work that my colleague Sam Tenenbaum has compiled on the inflections panning out through the Multifamily sector. Not only is the sector in the midst of several inflections both across the fundamentals and capital markets space, but we’re also tracking some compelling shifts that impact the age-old CBD versus Suburban debate.

On the former, we’ve witnessed the early foundations of recovery throughout the Multifamily capital markets. Private transaction-based cap rates across the full quality spectrum appear to have peaked with median, average, and top quartile cap rates all compressing Q/Q (see chart). Meanwhile, on the fundamentals, the sector witnessed a 75% Y/Y increase in net absorption, totaling 440,000 units, making 2024 the second-best year for demand since 2000. While supply-side pressures persisted in 2024, it’s easy to understand the renewed optimism around the Multifamily sector’s inflecting fundamentals given that new deliveries are projected to fall by roughly 50% Y/Y in 2025.

Returning to the age-old CBD versus Suburban debate – we recently explored several “myths” that have formed around urban living in the wake of the pandemic. The mass-suburban migration in 2020-2022 led to a shift in investor perception: CBDs were never going to truly recover, and the suburbs would continue to garner outsized demand, rent growth, and investor capital. That perception continues to shape investment strategies today, so much so that a single investment thesis (i.e. targeting relatively newer built product in good suburban submarkets) – captured the strategy articulated at nearly every meeting we had with institutional investors at NMHC, the nation’s largest multifamily conference.

However, recent incoming data points to upside in the outlook for CBD Multifamily and suggests that investors would be wise to not completely write off America’s downtowns. CBD fundamentals have started to outperform their suburban counterparts, with both lower vacancies and slightly more rent growth. Since the midpoint of 2023, CBD vacancies have been in line with the suburbs, and effective rent growth, which had been weighed on by a 60% increase in new supply since 2017, outperformed the suburbs throughout 2024. Affluent renters (those that choose to rent for lifestyle choices) have continued to lease new, urban apartments. And, it goes somewhat without saying that these higher-income renters generally have healthier household balance sheets than their suburban counterparts, as evidenced by lower rent-to-income ratios in high-rise properties compared to garden and low-rise product. Such stronger renter financial health insulates property income and also presents more upside risk to the outlook for CBD multifamily as compared to the suburbs, especially as inflation continues to weigh on lower income Americans.

Not only are the fundamentals slightly better in CBDs, but relative asset pricing favors CBD investment as well. From 2015-2019, the cap rate premium for CBD assets hovered between 65-120 bps depending on the year. Today, the premium stands at just 30 bps. Such opportunities typically don’t last long. With many of these CBD apartments priced well below replacement costs, and with improving fundamentals—now appears to be an opportune time to invest in urban cores and ride the multifamily recovery.