For the week of Dec. 2nd-6th
Leading the week’s economic news was a strong report on the U.S. labor market and the Fed’s latest Beige Book. The LightBox CRE Activity Index ended November at 80.5, 15.4 points lower than the October reading, but 12.7 points higher than the same period last year, reflecting the growing momentum building in the market as year-end approaches. A CBRE titan advises a nuanced look at opportunities, and office-to-residential conversions gain traction in downtown markets.
Here’s our latest top 5 list of the biggest weekly CRE news stories and why they matter.
- Labor Market Rebounds with 227,000 Payrolls Added in November
The Labor Department released November data with a more-than-expected 227,000 payrolls added as the job market rebounded from the impact of October’s extreme hurricanes and port strike. Strong job growth underscores the solid growth potential for the U.S. economy. The latest report, however, was a mixed bag given that the unemployment rate ticked up slightly to 4.2% from 4.1% previously, largely due to supply constraints.
Why It Matters: The strength of the U.S. labor market likely means the Fed will lower interest rates again at its December meeting, but that depends on the December 11th CPI report. Futures markets are now predicting a roughly 90% chance of a cut at the December meeting. After that, recent comments from Chairman Powell and several Fed Governors suggest a slow, cautious path toward future rate reductions, as inflation seems poised to be a top narrative as the market heads into 2025.
- LightBox CRE Activity Index Lands 12.7 Points Above Last November
The latest LightBox CRE Activity Index came in at 80.5, 15.4 points lower than October, and 12.7 points higher than the 67.8 reading one year ago. The month-over-month decline in November was anticipated given that over the past three years, the October-November drop averaged 14.7 points. This year’s slightly steeper decline was likely a function of market uncertainty reflected by recent volatility in the U.S. 10-year Treasury yield as investors assessed the outcome of the November election.
Why It Matters: The Index, drawn from the volume of commercial properties listed for sale, environmental due diligence demand, and commercial appraisal activity is an early indicator of the market’s collective CRE dealmaking velocity. Behind the dramatic 12.7-point increase year over year were double-digit increases across all three CRE activity indicators. One year ago, rates were locked at high levels, lenders held fast to the reins, and sellers were reluctant to list properties given the high degree of pricing uncertainty. November’s Index is an encouraging sign of growing momentum as year-end approaches.
- “2025 Will Be Better than 2024, but Not a Banner Year,” CBRE’s Levy Predicts
In the latest CRE Weekly Digest podcast episode, CBRE’s Global Client Strategist and Senior Economic Advisor Spencer Levy highlighted the major shifts of the post-COVID market, including the impact of higher interest rates and shifting sands in the types of property in demand. Levy advised CRE decision makers to get used to interest rates staying higher for longer. The two trends Levy expects are most likely to shape the next stage of the market are the reshoring of manufacturing and the growing popularity of live-work-play developments.
Why It Matters: Given how much disparity there is across asset classes and metros, Levy stressed the importance of investors looking past generalizations to pay attention to submarkets and sub-asset classes. His overriding theme was for investors to “follow the money and then follow where the money isn’t going” to find the greatest ROI.
- CRE Lending Remains Muted, Says Latest Fed Beige Book
Based on the Federal Reserve’s latest summary across districts for the period from late October to late November, CRE market conditions are mostly “flat on average” and CRE lending remains muted. Investment demand, however, is improving and contacts generally reported that financing remained available.
Why It Matters: CRE lending remained tight throughout 2024, challenged by high borrowing costs and concerns about banks’ risk exposure. There are early signs that CRE lending volume is increasing, but it will likely be some time before the impact of the first few rate cuts translates into any meaningful improvement in loan originations. Forecasts for 2025 point to more debt capital available to borrowers looking to finance both new originations and refinancing activity on maturing loans.
- Office-to-Residential Conversions Building Momentum
Developers investing in projects to buy old office towers and convert them into multifamily units is gaining traction. As office vacancy rates rise and property values fall for some older office properties, the math behind conversions to multifamily are becoming more viable. Over 70 conversion projects with more than 10,000 units have already been completed in the U.S. this year, and another 94 projects are underway. In the latest example, the historic office building, the Wanamaker Building at 1300 Market Street in Philadelphia was placed into receivership in September 2023 amid foreclosure proceedings. Developer TF Cornerstone acquired a majority of the debt that was previously held by a CMBS trust. After more than a year of speculation, its future as the latest office-to-residential conversion is coming into focus. Occupancy dropped from 96% to 35% over three years post-COVID. Other examples of historic office building conversions include the Flatiron Building in Manhattan and Cincinnati’s Union Central Life Insurance Building.
Why It Matters: Manhattan, Chicago, and Washington, D.C. are leading the way in downtown office-to-residential projects, but conversions have also been announced in smaller metros like Phoenix, Houston, and Dallas. While the conversions in office are only a small percentage of total office inventory, cities are starting to roll out subsidies, tax breaks, and other incentives to drive developer interest.
For commentary on these CRE developments and more, tune in to the LightBox CRE Weekly Digest podcast.
Did You Know of the Week
Did you know that YTD in the second half of 2024, the strongest growth in Phase I environmental site assessments could be found not in large primary metros like NYC, LA, and Chicago, but in smaller, secondary markets like Minneapolis, Cincinnati, San Diego, Columbus, and Charlotte? These five metros grew by an average of 25% YoY compared to 5% across all primary metros modeled in the LightBox EDR ScoreKeeper model. Phase I ESAs are an important early indicator of where CRE lending and investment activity is rebounding as environmental due diligence is typically required underwriting prior to CRE loans and transactions.
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