Chief Economist’s Perspective: The Tide Is Turning for CRE

U.S. Economy Strong Heading into 2025 with Positive CRE Outlook

The U.S. economy is in the sweet spot

The U.S. economy is in the sweet spot, growing robustly while inflation is working its way back to the Fed’s 2% target. Real GDP is on track to grow by 2.7% in 2024, and the second half of the year was every bit as strong as the first. Real-time GDP trackers estimate growth will come in above 3% for Q4, driven largely by the unflappable U.S. consumer who is benefiting enormously from stock and housing market wealth effects, let alone a resilient labor market and more than decent real wage growth. The labor markets are cooling off though, by the Fed’s design. As the final data rolls in, we expect job growth to be north of 2.5 million in 2024, on top of the 3.5 million it created in the prior year. The unemployment rate is hovering near 4%, a level that is widely believed to be consistent with full employment. And it has been below 4.5% for 38 straight months, which is only bested by the mid-1960s expansion historically.

The supply side of the economy is once again firing on all cylinders and productivity is up, which is enabling strong growth without reigniting inflationary pressures. The personal consumption expenditures (PCE) index, the Fed’s preferred measure of inflation, was down to 2.3% year-over-year (YOY) in October. Excluding the shelter component, which most agree has been distorting the inflation picture, the PCE has been below the Fed’s target rate of 2% for over a year. Inflation has largely been tamed at this point, and barring a major setback, the Fed will continue cutting rates, albeit gradually.

Strong Fundamentals Going into 2025

The U.S. economy has been consistently good for so long that it has driven recession odds down to sleepy normal levels. The 12-month recession probability is now at 15%, roughly consistent with the historical average. This is an astonishing improvement, considering we started the year at a 40% probability. Corporate profits remain healthy—growing in the high single-digits YOY throughout 2024. With businesses this profitable, it’s difficult to see massive layoffs occurring anytime soon. Corporate profits typically must decline for three to four straight quarters YOY before we see significant job losses. As we head into 2025, the underpinnings of the U.S. economy remain as strong as ever.

Property sector gaining momentum

Demand for property remains mixed but is generally healthy overall. Demand for data centers, apartments, experiential retail and high-quality office is better than just healthy—it’s thriving. Meanwhile, as expected, demand for industrial space tapered off, following the unprecedented surge experienced prior to 2024. Still, the U.S. industrial sector is projected to absorb north of 100 million square feet (msf) in 2024, and this will pick up in 2025 as space needs grow in conjunction with e-commerce and increased consumer consumption. The rest of the office sector outside of the high-quality echelon, remains challenged. But with new supply constrained and return-to-office gradually trending higher, demand is beginning to trickle down to the next best thing. On a risk-adjusted basis, well-located Class A office will emerge as one of the stronger opportunities in CRE over the next few years. The capital markets remained subdued for most of 2024, but green shoots are emerging as we head into 2025. REIT prices are up 30-50% from a year ago, debt costs have improved by 100-125 basis points (bps), CMBS issuance is up well over 150% from a year ago, and most importantly, real estate is generally looking fairly priced again.  

As always, there are downside risks to the outlook—with potential missteps in monetary policy and Trump policies at the top of the list. However, when are risks ever absent from an outlook? Property performed well during Trump’s first go. Prospects are good that it will do so again.

Read more of The Chief Economist's Perspective.