Is Commercial Real Estate Entering a New Liquidity Phase?

The New York commercial real estate (CRE) market has facednotable liquidity constraints for most of 2024, shaped by factors such aselevated interest rates, tightened credit standards, and investor wariness.However, there are promising indicators that we could be on the cusp of arevitalization, with optimistic signs suggesting an uptick in liquidity as wehead into 2025. As a stakeholder in the industrial and logistics real estatesector, DHPH is tracking these changes closely, assessing how the evolvingfinancial landscape will impact growth opportunities and decision-making forthe coming year.

Interest Rates and Inflation: A Potential Turning Point

One of the major headwinds for CRE liquidity in 2024 hasbeen the Federal Reserve’s aggressive stance on interest rates. Since early2022, the Fed has executed a series of rate hikes aimed at taming inflation,increasing the cost of capital and making financing new acquisitions orrefinancing existing properties far more challenging. According to Moody’sAnalytics, this environment has been particularly challenging for CRE segmentswith high capital needs, such as the office sector, which has seen an increasein vacancy rates.

Nevertheless, recent indicators show inflationary pressuresmay be easing, potentially setting the stage for a stabilization of interestrates. J.P. Morgan’s recent economic outlook notes that as inflation cools,U.S. Treasury yields have moderated, spurring speculation that the Fed mayadopt a more accommodative stance in 2025, on the heels of several modest ratecuts in 2024. For CRE stakeholders, this could ease financing difficulties andcreate an environment where liquidity becomes more accessible. Lower borrowingcosts would support refinancing efforts, especially for properties with strongincome potential, and could reduce risk premiums for investors evaluating entryinto or expansion within the market.

A soft landing scenario for the U.S. economy—where growthslows but remains positive—would further support CRE value stabilization,particularly in resilient sectors such as industrial and logistics, in whichDHPH specializes. Stability here could open new financing channels andencourage capital flows back into CRE, invigorating property markets that havebeen sidelined by the cost of capital and tightening credit.

Sector-Specific Liquidity Trends

The industrial and logistics sectors have shown resiliencethrough economic ups and downs, largely due to structural demand drivers suchas e-commerce and last-mile delivery. Markets like Brooklyn and Queens haveseen sustained demand for warehousing and distribution centers, with steadyoccupancy rates and rental growth despite broader market challenges. In fact,PwC’s Emerging Trends in Real Estate 2024 report emphasizes that industrialassets in key urban locations continue to experience high demand, and, as aresult, these assets often maintain strong liquidity profiles.

In contrast, the office sector remains beleaguered, withelevated vacancy rates particularly affecting older, under-occupied buildings.High-quality office properties in Midtown Manhattan, for example, continue toperform well and retain liquidity, underscoring the importance of assetquality. This bifurcated market means that investors are likely to channelliquidity toward sectors and properties with robust fundamentals, likelogistics and industrial assets, while underperforming office properties maycontinue to struggle with capital flight.

Multifamily and alternative real estate investments such asself-storage also show strong liquidity prospects. With rental demand stillhigh, multifamily assets have performed relatively well, bolstered by ongoinghousing shortages. The self-storage sector, similarly, has remained resilientdue to lifestyle and demographic trends favoring storage needs. As CBREreports, investors are increasingly targeting sectors that are less vulnerableto economic swings, suggesting liquidity will favor CRE assets with stabledemand profiles and income growth potential.

Indicators of a New Value Cycle

As we close out 2024, various indicators point to apotential turning point in the CRE market. Invesco’s real estate outlook notesthat while transaction volumes remain below pre-pandemic levels, easingeconomic conditions could spur a revival by early 2025. However, this recoveryis expected to hinge more on property income growth than cap rate compression,meaning that investors will need to focus on effective asset management andoperational efficiency to unlock value.

Capital that has been sitting on the sidelines may soonre-enter the market, particularly if interest rates trend lower as anticipated.As Forbes reports, private equity firms have accumulated significant drypowder, with institutional investors ready to move when market conditionsbecome more favorable. These capital flows are expected to target high-growthsectors, including industrial logistics and multifamily, as well as alternativereal estate investments. This renewed interest in sectors like logistics isfueled by fundamental trends, such as e-commerce expansion and supply chainrestructuring, which continue to drive demand for industrial spaces.

At DHPH , we see this potential influx of capital as asignificant opportunity for growth. In a more liquid environment, we arestrategically positioned to capitalize on demand for last-mile logisticsfacilities in New York City’s outer boroughs, where zoning and land use favorindustrial development.

Challenges Ahead for CRE Liquidity

Despite the encouraging signs, significant challengesremain. A looming wave of debt maturities in the next few years could strainproperty owners’ refinancing options, particularly for underperforming officeassets. According to Cushman & Wakefield, more than $1 trillion in CRE debtis set to mature by 2025, with a sizable portion of that debt tied to officeproperties. Refinancing under tighter credit conditions and heightened riskaversion from lenders presents a challenge for these owners, who may face difficultiesattracting capital or securing favorable terms.

Moreover, even if interest rates ease, financialinstitutions may continue to enforce stringent lending standards. Banks andother traditional lenders have become more cautious about extending credit toriskier projects. This environment suggests that liquidity will remain limitedto assets with strong income-generating potential and attractive risk profiles,reinforcing the focus on high-demand sectors like industrial logistics,multifamily, and self-storage.

Outlook for 2025

While the New York CRE market has faced a difficult year,the possibility of easing interest rates and a stabilized economic environmentoffers a promising outlook. For DHPH , this presents a unique opportunity toexpand in high-potential sectors such as logistics, as well as explorealternative asset types that align with evolving market dynamics. Ourcommitment to identifying resilient assets with long-term value is paramount,and we remain optimistic that renewed liquidity will strengthen our capacity tomeet market demand, especially in the industrial and logistics segments.

The anticipated liquidity cycle in 2025 could provide thefinancial flexibility and stability needed to support new projects andstrategic investments. As capital begins to flow back into commercial realestate, we at DHPH  are prepared toleverage this momentum to drive growth, contributing to a dynamic and resilientreal estate landscape for New York City and beyond.

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