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The Federal Reserve’s 50 basis point rate cut should set the table for more real estate investing, but it may take time for the floodgates to open. In a virtual event, Richard Barkham, global chief economist and head of America’s research at the real estate services firm CBRE, said the first-rate cuts may lead to a “more than a moderate improvement” in commercial real estate investing.
CBRE is forecasting two 25-basis-point cuts this year and 150-basis-point cuts in 2025. Barkham sees a soft landing in the economy.
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“There’s been a sea change in optimism in real estate capital markets,” he said. He believes there is a marked change in sentiment as some of the anxiety of the first part of the year has faded. He says cap rates have likely peaked and are unlikely to fall over the next several months.
Each sector of commercial real estate has its trajectory. While commercial real estate distress is an ongoing concern, green shoots are in the market. Office leasing has been steady, and Barkham noted a notable pickup in Manhattan, which may mean the start of a new cycle. He is anticipating a long, slow improvement in office markets.
Multifamily and industrial may be currently reaching a bottom and set to rebound next year. Retail has remained strong simply because not a lot of new supply is coming to the market. One area Barkham is watching closely is the hospitality market. There are some signs that people are booking less travel and he sees hotel real estate as being in a “very mild extended trough.”
The Value Of A Soft Landing
Although we may have avoided a recession, Barkham still sees the potential for bank failures partly due to real estate distress. Darin Mellott, vice president and head of U.S. capital markets research for CBRE, who was also in the briefing, called out the rise of private funding, saying that “liquidity in the banking center isn’t going to be as abundant” and that private debt funds may fill in some of those gaps.
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Barkham agreed, noting that numerous alternative sources of debt are available and that banks’ unwillingness to lend may not slow down real estate recovery. “I don’t think the fall in the cost of debt is sufficient to release a huge wave of that dry powder capital,” Barkham said. “I don’t think we’re going to see an explosion, I think we’ll see a very meaningful uptick in investment activity next year.” He called it a slow rising tide rather than a tidal wave.
CBRE predicts that annual real estate investment will be up 5% this year. Barkham is calling for next year’s growth to be between 15% and 20% compared to this year.
The potential for rate cuts to create more private debt activity is also something that EquityMultiple, a real estate investment platform, sees as a positive development. “We expect the rate cut to create favorable refinancing scenarios, especially in sectors like multifamily, which have been historically resilient even during market volatility,” said Marious Sjulsen, Chief Investment Officer at EquityMultiple. “With over $1 trillion in commercial real estate loans maturing by 2026, refinancing activities will surge, creating unique opportunities for investors looking to capitalize on this liquidity shift.”
The enduring need for more multifamily real estate was also mentioned during the CBRE briefing. Multifamily has a high supply level right now, which is good news for renters, but it has slowed the pace of development, and multifamily starts have fallen. Barkham believes the rate cuts should lead to modest growth in multifamily development in the Sunbelt and other markets.
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This article A Rising Tide Rather Than An Explosion: CBRE’s Global Chief Economist Forecasts 5% Increase In Real Estate Investment, Bigger Lift In 2025 originally appeared on Benzinga.com