Capital Markets Report

4Q 2024
�ǿ��app�� Research presents the Fourth Quarter 2024 Capital Markets Report.

Economy. The fourth quarter of 2024 saw expectations for the U.S. economy firm up for the first time in a long time. GDP growth in 2024 came in at a strong 2.8%, with solid growth from consumers. Unemployment remains low, and finished the quarter at 4.1%, the same as June. The U.S. economy has made some headway on inflation, however YoY core PCE has remained stubbornly 60 to 80 basis points above the Feds long term target since May. Rate market expectations have largely settled on 2 rate cuts, though longer term yields have been more volatile, ranging anywhere from 3.7% to 4.6% during the 4th quarter, and was as high as 4.8 in January, 2025. The more important message is that the market has been consistently pointing to an equilibrium federal funds rate of 3.0% or greater, which would anchor long-term Treasury yields in the mid-3% to low 4% range even after the Fed has normalized its policy stance.
Debt Markets. CRE debt origination activity picked up momentum to end 2024, though volumes remain well below pre-pandemic averages. Overall, origination volume was up 15% in 2024. The number of active lenders has appeared to bottom out, and the 4th quarter posted the most unique lenders since 2023Q4, though still down nearly 30% from peak. Originations rose in 2024 in every sector aside from Retail and Dev Sites offsetting declines in other sectors. Banks were the only lender group to see volume decline year-over-year, but the 4th quarter showed positive momentum for the lending group, increasing 35% compared to 24Q3. All this is occurring while the market is set to absorb $2.0 trillion in debt maturities in the 2024-to-2026 period. 46% of this maturing debt was originated while the fed funds rate was less than 25 basis points, vs. 448 basis points at the end of 2024. Additionally, many loans are underwater or nearly so, especially recent loan vintages of most property sectors and broad swaths of office debt. We estimate that $542billion in debt maturing between 2024 and 2026 is potentially troubled.
Equity Markets. Investment sales increased 6% year-over-year in 2024 but down 29% compared with the 2017-to-2019 average. Office sales were up 65% quarter-over-quarter, while multifamily was up 20%. Liquidity has been strongest for smaller transactions. Deals under $100M made up 66% of volume traded in the last four quarters. Institutional investment was up in 2024 by 28%, with a 49% increase in Office acquisitions, though institutional remains net sellers of Office.
Supply of Capital. Dry powder at closed-end funds currently sits at $328 billion, down 12% since December 2022. Dry powder at value-added, opportunistic and debt funds are now well-off their peak levels, with most of that targeting Residential and Industrial properties. Much of this dry powder was raised from prior vintages. ODCE fund flows decelerated showed net outflows for an 9th straight quarter. Redemption queues remain an issue for many funds, driven by persistent if narrowing gaps between NAV and market values.
Pricing and Returns. Transaction markets now show clear increases in transaction cap rates, following the public markets. Nonetheless, both in the private and public markets, cap rates appear distinctly unattractive relative to the cost of debt capital, possibly excepting office REITs. This is not surprising in the private markets, where transaction volumes are muted and reflect selection bias and appraisal-based valuations lag market conditions. Extremely narrow cap rate spreads in the REIT markets are harder to justify and seem to require a rapid decline in debt costs, historically abnormal NOI growth or a combination of the two. Notwithstanding the structural deficiencies in NCREIF valuations during periods of rapid change like today, NCREIF NPI broadly improved in 4Q24 and posted its second straight quarter of positive returns. All sectors recorded positive total returns except for office. 80% of markets recorded positive total returns in 3Q24 up from 69% in 4Q23.