The commercial real estate capital markets are in a much better operating environment to start 2025 than they were versus this time last year. The reasons for this are numerous, including a short-term rate-cutting cycle that is helping keep floating rate debt and rates around 4% to 4.25% on the long end of the curve, which is allowing for improved activity, said James Millon, president of U.S. debt and structured finance at CBRE.
“We're in a better position to actually meet the market and have the creative leverage to unlock some disposition activities, which I expect to continue into 2025,” said Millon.
Specifically in the debt capital markets, Millon said that he expects the return of big commercial banks and U.S. money center banks in the market to continue into 2025, kickstarting bilateral transactions and financing activity. Multifamily, industrial, self-storage, data centers and grocery-anchored retail are all liquid asset classes that have seen an uptick in bank interest that is expected to continue this year, he said.
Millon said banks have been challenged by limited payoffs because of elevated interest rates that all but ceased elective refinancing and asset sales because the financing attached to those sales was no longer accretive. This led to bloated balance sheets, and banks were weighed down by legacy assets, particularly in the office sector, which continues to have fundamental issues.
“There's certainly been a lot of work that has been done behind the scenes over the last two years, through restructurings, modifications, asset sales and loan sales, to get banks back into a place where their balance sheet is manageable,” he said. “I think that the regional banks and the smaller localized banks are going to continue to have to work through situations and maybe do larger loan sales to free up some capital.”
Going into 2025, both the debt and equity capital markets feel positive, said Millon.
“If you talk to investors or you talk to lenders, the motivation is there,” he said. “The dry powder that is sitting on the sideline is greater than at any time in history to come back into the market. What we're not there on quite yet is the pricing.”
Although bid-ask spreads continue to be a challenge, CBRE anticipates market participants will come into better alignment in 2025 and it expects a moderate recovery in investment activity.