Commercial Market Snapshot Q4 2024

MARKET OVERVIEW

The third quarter’s performance was better than expected and market sentiment continued to climb in the fourth along with broad deal activity. There was general optimism over the return of a “business-friendly” administration to the White House, but there was caution as the industry wondered when Commercial Real Estate (CRE) interest rates would also become friendlier.

Optimism spurred by the .5% interest rate drop by the Federal Reserve (the Fed) in September pushed transaction volume to $68B in Q3, according to CoStar. This activity was off only 18.1% on an annual basis and an advancement of 10.5% from Q2. Also, year-to-date, 12-month rolling sales volume was slightly ahead of 2023. Transactions in Q4 were boosted by investors getting into the market ahead of a full rebound. Indeed, Costar reported that prices picked up for the third month in a row in October and cap rates may be compressing. While Office slightly pulled down the overall Q3 delinquency figure and distress deals rose in September, troubled properties have yet to play a big role.

The four major asset types all saw stronger deal activity in Q3, reflecting stabilizing fundamentals. According to JLL, Industrial has normalized; although vacancy ticked up again, rental rates remain the most attractive of all major asset classes at 3%. Retail rent growth was the strongest since 2008, and the holiday season heralds more in-store shopping and higher spending. Per the National Association of REALTORS^®, Multifamily net absorption¹ was again over 100% and the vacancy rate crept down. Even the concerned outlook for Office has tempered as net absorption¹ became positive in Q3 for the first time in eight quarters.

The Fed’s rate cuts totaled .75% through November, but commercial rates have yet to follow. The 5-², 7-³ and 10-year⁴ Treasury rates (which drive commercial rates) were all at least 75 basis points higher in mid-November than in September – a market signal that rates will be higher for longer due to president-elect Trump’s policies.

Trump’s stated goals include cutting corporate taxes – which may foster a larger government deficit while boosting the economy – as well as increasing tariffs broadly, but these factors could relight inflation. For CRE, the new plans may be both dampening and supportive.

For example, CHiPs and IRA allocations, which boosted Industrial development, may be slowed. But onerous tariffs could prompt more onshoring. An emphasis on reducing corporate burdens may inform upcoming debates on capital gains and 1031 exchanges, carried interest breaks and environmental standards. For right now, despite the unknowns, positivity is in the air.

A DEEPER DIVE: DATA CENTERS

For the past year, headlines about Artificial Intelligence (AI), and by extension, data center development, were unavoidable and optimistic. Of late, the costs of data center energy and water usage have come under scrutiny, particularly in some of the largest markets: Virginia, Texas and Georgia. Thus, growth may be easier in new markets.

The chart below details data center placement. New centers in new submarkets could become future clusters. For example, Virginia, which is already the dominant data center cluster in the U.S., will have the most expansion of a new computing footprint. But over half of the additional square footage will be an Amazon facility in Fredericksburg (about two hours south of Washington D.C.). In the West, while few new markets are in development, it is notable that Colorado and Indiana are getting data centers, albeit smaller ones, for the first time. In the Southwest and the Southeast, new construction will more than double the current situation. An Amazon building outside of Jackson, Mississippi, may bring more emphasis there. The Austin, Texas area will remain one of the top places for data centers, although smaller expansions are happening farther afield in Temple and Abilene.

WHAT’S NEXT? 

Stay tuned for next month’s Economic Update Q4 2024 to see how the year ends and what 2025 could have in store for commercial real estate.  

¹ Copyright© 2024 “October 2024 Commercial Real Estate Market Insights.” NATIONAL ASSOCIATION OF REALTORS^®. All rights reserved. Reprinted with permission. November 2024, https://cms.nar.realtor/sites/default/files/2024-11/2024-10-commercial-real-estate-market-insights-report-11-07-2024.pdf

² Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis [DGS5], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS5, December 2, 2024.

³ Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 7-Year Constant Maturity, Quoted on an Investment Basis [DGS7], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS7, December 2, 2024.

⁴ Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis [DGS10], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DGS10, December 2, 2024.