Q4-2024
Writer: Teresa Marziano, Real Estate Salesperson
Q4-2024
Writer: Teresa Marziano, Real Estate Salesperson
The year 2024 ended the way it started, surprising everyone. Employment and consumption trends underpinned a stronger than expected economy and, as a result, the Federal Reserve delayed the start of the interest rate cutting cycle. Economic resilience reaffirmed the United States growth leadership among developed nations. The US dollar continued strength reflects, in part, positive capital inflows as investors favored our economy and stock market despite uncertainties that lie ahead.
Commercial Real Estate and bond investors endured a seesaw in expectations throughout 2024. The path that interest rates and inflation would follow became unpredictable even as interest rate cuts finally started in September. A remarkably strong US economy and structural labor shortages prevented inflation from falling toward the US Federal Reserve target and policymakers proceeded with interest rate cuts that were smaller than initially expected. As we look forward, economic momentum will be augmented or dampened by the new administration’s trade, taxation and other economic policy changes.
Despite declining short-term rates, medium- and long-term rates borrowing costs have barely moved compared to the fall of 2023. Inflation and deficit concerns suggest that prolonged interest rate volatility seems inevitable. It is also possible that this shallow interest rate cutting cycle has entered a long hiatus and rate sensitive segments of the economy need a strategy for self-help to stay ahead.
Commercial Real Estate investors are trying to adapt to a new, lower valuation and financing regime that fortunately is materializing during a period of supportive demand trends. During 2024, rescue and re-recapitalization investment opportunities began to emerge for CRE investors, however, they were limited to institutional size investments in large gateway cities. This is likely to change in 2025.
Trepp estimates that approximately $253 billion of commercial real estate mortgages were securitized between 2014 and 2016. These loans carry coupons between 4-5% and are facing imminent maturity and higher refinancing rates of as much as 200 basis points. Some of these loans may already be in the hands of special servicers, working through a possible restructuring, enjoying a temporary term extension or waiting for collateral liquidation. As a result, during 2025 and beyond we expect an increase in CRE transaction volume that will test the market’s appetite for commercial real estate and establish clearer valuation parameters.
At of the end of 2024, Trepp’s (National) Commercial Property Value Weighted Index showed a 12.57% value drop from its cycle peak in Q3 2021. This index includes the main property types (office, multifamily, retail and industrial) plus hotel properties. The rate of decline differed among property segments, but they all exhibit downward pressure. Value decline percentages for office and multifamily exceeded the weighted index average while the industrial and retail segments only experienced percentage losses in the low and mid-single digits respectively. Underscoring the difficulties in price discovery, highly reputable Green Street Advisors’ property index indicated their all-property index increased 4.8% during 2024 while remaining down 17.8% from the index peak in 2022, Property weightings are at clearly the root of some of the differences between Trepp and Green Street as well as the mix of properties.
Value changes will always be impacted by local supply-demand idiosyncrasies. Westchester’s commercial real estate values have also been impacted by declines in in-place cash flow and a rise in capitalization rates. Except for offices properties, inplace cash flows have been resilient, therefore, value declines are like to be more modest that nationwide averages.
A meaningful decline in new deliveries allowed fundamentals to recover and pricing power to return to the hands of multifamily owners. New deliveries fell to a trickle after multiple quarters experiencing a large number of completions. Rent concessions remain stable and low. Under construction percentage has now declined to 7.7% of stock, the lowest level in more than three years. Rebound in fundamentals is supporting rental pricing for apartments and effective rents have remained at a high level.
Rising insurance premiums, and resulting impact on NOI, have resulted in a 3.6% drop in nationwide apartment property values since 2018, according to CBRE. Insurance premiums are the sixth largest expense for properties. On average, insurance comprises 8% of properties’ total expenses, but they’ve contributed to 17% of total expense growth since 2019, according to CBRE’s analysis. Landlords are making strides in operational productivity and addressing management costs but in a rising labor cost market, offsetting cost increases -such as insurance- has become even harder. Inevitably, NOI’s and valuation are impacted.
There appears to be a slight improvement in this battered sector after more than four years of declining demand. In NYC, leasing activity at the end of 2024 was viewed as a marked improvement versus almost any quarter since the Pandemic. Tenants in the legal and finance industry have been taking the opportunity to expand and consolidate while their negotiating power with landlords is high.
In Westchester, leasing activity was also much better than almost any quarter over the last three years and vacancies fell 0.4% from the prior quarter. Supply-demand was favorable, albeit by a narrow margin and net new space absorbed was close to 100,000 sf. While we have had two other similar (net absorption) quarters over the last three years, Westchester’s positive leasing activity resonates with the trend observed in NYC, providing hopes for a more sustainable turnaround. In addition, companies continue to demonstrate flexibility but want employees to spend more time in the office. As the labor markets become modestly more challenging for job changers, companies have a little more leverage in demanding office attendance. Underscoring a soft reversal in remote work, JP Morgan has been reported to be planning an expansion to their 2023 mandate that asked Managing Directors to work in person. This new directive would cover a multitude of lower-level positions that would be required to return to the office.
Westchester office leasing strength included direct as well as sublet space. In general, office lease prices have remained stable over the last year.
The year ended with a notable improvement in the supply-demand fundamentals for Westchester retail. During the quarter, space absorption was the highest in more than three years as new space occupied exceeded the amount of space returned to landlords. Occupancy improved by 0.4% and pricing by 2% from the prior quarter. Both direct and sublet space were active and contributed to leasing gains. Leasing was driven by small to medium size tenants and in-line mall spaces.
Despite robust consumer demand many retailers closed Westchester stores in 2024, and others will be closing in 2025. The particulars of the brand, its merchandising strategy and finances are the drivers. In Westchester, big-box retailers experiencing market share loss to on-line sales, are the most vulnerable. Its real estate is also the most difficult to repurpose. Some of the brands that are closing stores in Westchester are Party City, Gamestop, CVS, Dollar Tree and others. In contrast, mall operators have been able to boost occupancy and revive traffic by including more service providers in
their mix of tenants, increasing entertainment and food offerings and simplifying parking protocols. Shopping centers in Westchester already enjoy high occupancy and ownership teams continue to work at optimizing the tenant mix with the objective of enhancing foot traffic and creating a successful offering and cross shopping experience to visitors.
Westchester Industrial and Flex- Stability in a Coveted Market Sector
Industrial space demand continues to be robust. The first three quarters of 2024 brought some friction in the industrial/flex market and a modest supply surplus developed, and vacancy increased approximately 130 basis points. An improvement in the fundamental balance at the end of 2024 resulted in a vacancy rate decline of 30 basis points. Industrial rents have remained stable over the last two quarters.
Nationwide, there is a risk that supply chains could be partially reconfigured should meaningful tariffs be implemented during 2025. This could bring vacancies and disruptions within the national industrial warehousing network. However, Westchester is less likely to be at risk of a possible disruption due to the little, large-scale assembly and warehousing that takes place locally, especially in southern Westchester. Industrial and flex space in our markets is mainly occupied by lastmile delivery warehouses and service-oriented business, unlikely to be dramatically impacted by tariffs.
Westchester Transactions remain subdued
CRE transaction volumes recovered modestly during the fourth quarter of the year. Drivers were owner/occupier buyers that took advantage of a modest back-up in rates, early in the quarter. Transaction price per square foot also improved but this probably reflects the nature of properties sold, which had larger land lots than typical.
Overall, price discovery under the new valuation paradigm is still just beginning and investors remain hesitant with regard to valuation in an environment where transaction volume has been much lower than average, and financing volatile in price and hard to obtain. Looking forward to 2025, we need the rate environment to stabilize, and new economic policies to be announced and absorbed by the market, before we see a meaningful increase in transaction volume.
This report was researched and written by Teresa Marziano. Please contact Teresa (914- 441-2254) or (TMarziano@ HoulihanLawrence.com) for questions, comments or feedback about the contents of this report.
Commercial real estate is in the midst of a challenging period as low-interest rate maturities start to come due. Interesting commercial real estate investment opportunities will likely become available. Investors must be prepared to evaluate and make decisions expediently as opportunities emerge. Given consumer and market changes brought about by the intense period of change we have experienced due to the Covid legacy and structurally higher inflation and financing costs, it is very important to correctly assess market and economic risks that add to the complexities of acquiring commercial real estate. Understanding the ever-changing market forces that are shaping the fundamentals for each property requires a deep knowledge of the property, local and regional insights, and close contacts with the right financial partners. Our Team is highly skilled in all these areas.
Reach out to HOULIHAN LAWRENCE COMMERCIAL for a complementary assessment of your real estate, an evaluation of a purchase target, and to receive an in-depth perspective on the ever-changing Westchester commercial real estate market.
Westchester’s unemployment rate has remained low and service industries in the area have unfilled openings. Medical services-and related- in particular, are growing strongly, helping maintain growth in employment.
Overall, a growing labor force and low unemployment are positive for local consumption and for the County economic fundamentals.
County Unemployment Statistics - Not Seasonally Adjusted
Sources: COSTAR, Trepp, US. Bureau of Labor Statistics, Unemployment Westchester County (Not Seasonally Adjusted) , NY. Real Estate Employees Data is Seasonally Adjusted. All data retrieved from FRED, Federal Reserve Bank of St. Louis; January 2025
Multifamily rent growth resumes and vacancy declines as new deliveries fall significantly.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; January 2025
Office markets may be trying to find a bottom in occupancy. Leasing was strong during the fourth quarter and both direct and sub-let space experienced new demand that exceeded departures.
Retail shop fundamentals improved during the quarter. Retail rental prices gained ground and vacancies declined despite several large retailers rationalizing stores.
RETAIL FUNDAMENTALS IMPROVE
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; January 2025
Industrial fundamentals have stabilized; however, trade disruptions could bring, on the margin, some minor friction to local warehouses.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; January 2025
Investment sales volume improved modestly and median transaction prices PSF rebounded. Mix and land size in the assets that transacted was behind the rebound in price.
Price discovery is just beginning as the volume of transactions improve. However, interest rate volatility is impacting both, valuation and financing costs.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; January 2025