Dear Real Estate Person,
You survived until ’25. Mazel!
Since the Federal Reserve started raising interest rates in 2022, real estate pros kept repeating a similar mantra. Just stick it out this year and in the next one, you’ll make a killing. Keep chugging along. Keep pushing for extensions with your lender. Hit up your partners to pump in more capital. Talk to your attorney to be relieved of those personal guarantees.
But each year the finish line moves back. It’ll always be next year.
There is the possibility that 2025 is it: the moment real estate has been waiting for.
On the other hand, instead of surviving until ’25, you might now need to survive through ’25 and then “let it rip in ’26.”
Dealmakers can’t be blamed for yearning for optimism. Transaction volume slowed to record lows. Total volume for the first three quarters of the year for U.S. commercial real estate totaled the lowest amount since 2013, according to data from Altus Group.
And for all the talks of war chests of dry powder, institutions are reluctant to release it. If they are, they pick their spots in esoteric places: think Blackstone with data centers.
“We are all praying for lower interest rates,” debt broker Simon Ziff said at TRD’s Miami forum in November. “It’s really about interest rates and cap rates more than any single component.”
But there’s another just as likely reality: higher interest rates are here to stay. The Federal Reserve cut rates in December, but further cuts are expected to be less frequent.
The result: Real estate will be hard. It was never easy, but until 2020, if you had a building in a place with high demand like New York City, paid taxes and avoided buying First Republic stock options with money raised through a certain crowdfunding platform, you’d probably do alright.
With rates staying high, everything is expensive: financing, buying and operating. Attracting tenants is more competitive.
In the brave new world of real estate, owners have to be operators. Buildings are no longer just vehicles used to extract money. The game of buying at max leverage and then making out on the cash-out refinancing is over.
Yet, higher rates, which were the bane of the industry, might be a positive development. Near-zero rates also allowed any shmendrick who could cobble together enough money, or sometimes with no money, a chance to get in on NYC real estate. Higher interest rates have exposed the amateurs. Maybe that’s not a bad thing.
And even if rates are the reason the industry’s precarious now, the optimistic scenario is that it doesn’t need low rates to start healing, if operators find opportunities that aren’t dulled by paying more for money.
—Keith Larsen
To the office!
If you’re in commercial real estate, you’re expecting bigger things in 2025, and the numbers from the end of 2024 back you up.
Office leasing velocity increased at the end of the year, and leasing volume was up almost 50 percent in October from a year earlier. Midtown’s office sector is on its best pace since 2018, according to a report from the commercial brokerage Colliers.
“In terms of aggregated demand, things are improving,” said Dylan Burzinski, the head of Green Street’s office sector team. “New York is now firing on all cylinders.”
Though real estate is hyper-sensitive to interest rates, its corporate tenants have acquired some immunity to them.
“The economy has proven much less sensitive to interest rate hikes than in years past,” writes Apollo’s Torsten Slok. “American businesses are in the midst of a historic profit boom.” There’s plenty of room in the budget to pay for leases.
SL Green, Manhattan’s largest office REIT, is projecting occupancy across its portfolio to increase to 93.2 percent. Its stock is up 60 percent this year. SL Green is also buying again: It entered into a contract for an office building at 500 Park Avenue for $130 million. It is also projected to be a buyer of the Roosevelt Hotel in Manhattan, which it could redevelop into another office tower, according to Crain’s.
Another building worth keeping an eye on is Property & Building Corp’s 10 Bryant at 452 Fifth Avenue. PBC revamped the office tower with a $100 million renovation. The plans worked. While it is set to lose its anchor tenant HSBC, which is exiting to Hudson Yards, PBC is reportedly in talks with Amazon to lease space.
There are still few transactions, but fundamentals are improving.
Since the pandemic, there was a prevailing narrative about office, that it’s a tale of two markets. It’s top of the line and everything else. If you’re not One Vanderbilt or Hudson Yards you’re screwed. Might as well just give up on the asset. In fact, you might just reconsider every life decision you have ever made that got you to this point and pack your bags and leave your family.
But there’s some needed nuance to the discussion. In New York, the Ultra Class A (One Vanderbilt) and very good Class A (10 Bryant) are doing swell.
The higher-end Class B is the space worth watching in 2025. There are finally investors interested, at a major discount. Vanbarton recently sold off its 26-story Art Deco office building at 292 Madison Avenue for about $90 million, nearly half of what it paid for the property in 2016. Elsewhere in Midtown, Sentry Realty, the real estate arm of Alen Mamrout’s American Exchange Group, bought the $200 million debt on Savanna’s 1375 Broadway from Aareal Bank in August, with the debt selling for 90 cents on the dollar.
This is good news. The market needs more comps. More comps means a better sense of values. A better sense of values means more sales.
There’s another prevailing theory that we are actually running out of office space. And while the inclination might be to accuse this reporter of being a pawn for big office lobbyists, let’s hear it out.
“If you are a tenant of 100,000 square feet or greater, you should’ve done your deal already. By the time we get to ’27, you’re going to have a problem,” top CBRE broker Mary Ann Tighe said on an episode of CBRE’s “Weekly Take” podcast.
The idea is that the top of the market is gone. And companies looking for space would have to turn to the high Class B buildings. It’s not that crazy of an idea. At the right cost basis, buying these assets could be a lucrative proposition even with higher financing costs. The concept will at least attract some attention. We could get a hint that it’s true if someone can raise money to start building new Class A — or if Silverstein Properties can secure an anchor tenant for 2 World Trade Center.
This interest likely won’t trickle down to the lower-end Class B and C. Rents are much cheaper and the space attracts a different type of tenant.
But things might not be as bad as they once appeared.
Occupancy numbers aren’t so grim on the aggregate in Manhattan with vacancy hovering around 15 percent in the third quarter, according to CBRE. (In other downtown areas like St. Louis, it is that bad.)
And most of the people talking about the demise of Class B and C are office owners with Class A stuff. (Paging Jeff Blau!) Return-to-office might have required a five-year campaign of LinkedIn think pieces, but enough workers are back that employers might not downsize when they renew leases. This wave of foreclosures everyone has talked about has yet to occur. Banks did not want to take over commercial assets in 2024 so it’ll be hard to believe that in 2025 they’ll change their sentiment.
— Keith Larsen
Multifamily investors join the game again
The Sun Belt investors ravenous for multifamily when low-low rates and rising rents made buying a no-brainer clamped their pieholes and crossed their fingers in ’23, then ’24, that the Fed would ax rates and save their deals.
No such luck.
The central bank knocked 1 percentage point off the federal funds rate last year, a drop in the bucket compared to the 5 percentage point run-up. Then it twisted the knife, scaling back its rate cut projections for 2025 and dashing the hopes of distressed investors and their lenders, who have begun to realize kick-the-can won’t work if rates stay high.
The era of pretend-and-extend may be coming to an end “as lenders and equity are growing impatient with borrowers,” Gray Capital’s Spencer Gray wrote in a recent research brief.
But commercial brokerages see glimmers in the muck.
“Multifamily is the most preferred asset class for commercial real estate investors in 2025,” CBRE wrote in a 2025 forecast.
Some investors watching distress from the sidelines are finally starting to get in the game. S2 Capital and WindMass Capital, two groups that weathered the downturn, each picked up sprawling portfolios owned by syndicator GVA, a firm that spent most of 2024 in deep doo-doo and figures to be offloading assets at bargain-bin prices.
The market needs more comps. More comps means a better sense of values. A better sense of values means more sales.
Meanwhile, institutional firms such as KKR and Blackstone tapped 2024 to pick up Class A apartment buildings. In some markets, the product is trading below replacement costs given the rise in rates and drop in rents.
Whether those investment trends ramp up depends heavily on supply, a “key theme” for 2025 by RealPage’s projections.
Rent growth has tracked negative for a year and a half as record deliveries overwhelmed most markets. But new units — expected to hit 500,000 in 2025 — should wane through the second half of the year and fall off a cliff in 2026.
Rental demand should stay strong as ever, stoked by high housing prices and interest rates. As new leases outstrip deliveries, rents will once again start rising, offering investors a fat carrot.
The “elephant in the room,” as Yardi Matrix phrased it, is President Donald Trump.
There’s a chance that Trump’s proposed tariffs spur inflation that could derail the Fed’s cutting cycle and push investors back to the sidelines. On the other side of the coin, investment sales could benefit from Trump’s 2017 tax cuts and other pro-growth policies.
Whatever his moves, Yardi Matrix noted policy could “take months or even years to work its way through the economy, so the Trump administration’s impact will not likely be felt until at least the latter part of 2025.”
— Suzannah Cavanaugh
In resi, a gut punch for anyone who’s not in luxury
Last year was a banner one for fans of the phrase “looming rate cuts.”
For everybody else in the resi world, it wasn’t so fun — a year of false starts, discounted sales and, well, lawsuits — but we’re here to talk about the market.
The story across the country was bleak. In 2024, the National Association of Realtors projects 4 million home sales, the fewest since 1995. The one-two punch of escalating home prices and elevated interest has dropped median-income-earning American homebuyers to their knees.
But New York is not America, and the 14-foot-ceilinged condos and double-wide townhouses dotting the city give the world’s wealthiest all the more room to park their cash. Contract numbers rebounded 15 percent from last year’s nadir, but not enough to line agent pockets or halt brokerage cost-cutting (TRD’s 2024 holiday invite list was conspicuously short).
But the back half of the year, rates be damned, saw a proper pickup in activity — new development had its best month of the year in terms of contract signings in October, which exceeded pre-Covid averages — which has given the industry optimism that might be slightly more earned going into 2025 than it was 2024.
The year was buoyed by the luxury market, which has turned out to be a bulwark against the lock-in effect freezing sellers and buyers afraid to give up their juicy 3 percent mortgage.
What’s not likely to change is the downward trend in sellouts for condo developments. Billionaire apartment-hunters can whip out the old ATM card for an eight-figure home, but their developer counterparts remain at the whims of financing and construction costs.
The holdup may come less from developers, who have gotten comfortable with construction loan costs, and more from sellers — and their lenders — who are still holding debt-laden properties.
“How quickly will the banks and the CMBS market be to reset and mark to market these properties so that they can actually be redeveloped?” Steve Kliegerman, president of Brown Harris Stevens Development Marketing, asked. “I think that process is probably going to take longer than people expect, which will most likely continue to limit inventory that will be supplied to the market for the next three to five years.”
Kliegerman expects to see an uptick in creative sale structures like JV partnerships between a property holder and buyer, or the use of hope notes — a refinancing that lowers interest-paying debt and returns money to the lender on a building sale — as ways to keep things moving.
In the meantime, developers bringing quality products to undersupplied areas like Miki Naftali, whose three boutique projects — 255 East 77th Street, the Henry at 211 West 84th Street and One Williamsburg Wharf at 480 Kent Avenue — are projected to sell out in under a year according to Marketproof, will continue to thrive. Mickey Rabina’s 520 Fifth Avenue has also fared well, with more than three-quarters of its 100 residences sold.
Zeckendorf Development’s 80 Clarkson stands as the lone upcoming luxury condo heading into next year that might try and touch the billion-dollar volumes of yore. In terms of ambition, the spindly 262 Fifth Avenue has the price-per-square-foot goals of a Billionaire’s Row tower, but a fraction of the units, with just 26 apartments.
Marketproof’s Kael Goodman predicts Manhattan will close out 2025 with just 3,700 available new development condos, where predictably popular projects — boutique and Downtown — get bought up quickly and little else gets built in the near term.
With interest rates not coming down anytime soon and mortgage rates continuing to trend the wrong way, 2025 may look a lot like 2024 — and we’ll probably be having this conversation again next year.
—Jake Indursky