Insights

Industry Experts Weigh in on Construction Boom Impact, Rent Growth

January 27, 2025

Industry Experts Weigh in on Construction Boom Impact, Rent Growth

Asked to sum up 2024 in two words, Victor Calanog, managing director and global head of research and strategy for Manulife Investment Management, said, “Tentative recovery.”

Calanog spoke at a fireside chat with Jonathan Schein, CEO and founder of Real Estate Limited Partner Institute, a Year in Review presentation of “What’s Next for Real Estate and the Life Experience” sponsored by the Counselors of Real Estate®. Reviewing multiple indicators for the year, Calanog expressed optimism that 2023 was the bottom for the commercial real estate market.

“In 2024 we’ve seen increases across the board for the calendar year compared to 2023 in terms of CRE loan originations and transactions,” Calanog said. “By contrast, coming into 2024, loan originations fell by about 47% in 2023 versus 2022. Transaction volume activity fell by 53% in 2023. It’s not a surprise that you saw that in parallel with credit drying up because of increasing rates.”

“It looks like a recovery is starting in Europe, although less so in Asia, and some companies are seeing new opportunities in the U.S.,” Calanog said. “Fingers crossed that we’ve turned a corner.”

Economic Outlook for 2025

While forecasting Fed activity and the economic outlook is complicated, Calanog said the question he is asked most often is “where are we in the economic cycle?”

“For most of 2024, GDP growth was about 2.2% or 2.4%, which is not bad,” Calanog said. “Some people think GDP should be higher, but the last time we were at 5.5% growth was in 2021 and that’s when we saw inflation. I think 2% to 3% growth is the sweet spot. It’s robust enough to withstand some catastrophic event like a major hurricane off Galveston without the U.S. economy getting knocked down, but it’s not so fast that the threat of inflation rears its ugly head.”

There are multiple unknowns that could impact the economy, including the threat of tariffs and a decrease in available labor due to immigration policies, which could be inflationary depending on how the policies are written, he said.

From an underwriting point of view, investors may need to run numbers using scenarios with a slight cap rate decline and the possibility of rates remaining high, Calanog said. Investors will need to look at deals individually under different scenarios.

While there has been some talk of private capital disappearing from real estate investment because of the back-and-forth between short-term and long-term interest rates and the concern about the potential return of inflation, Calanog is not convinced this will happen. In addition, he pointed out that the U.S. has diverse sources of capital, with about 38% of capital for real estate investments coming from banks compared to 80% in other countries.

Property Sector Prognosis

The consensus among several investor surveys is for overall CRE returns to end 2024 at 6.6% and to reach 7.6% in 2025, Calanog said. But performance will vary from one sector to another.

The multifamily sector will see oversupply in the short term in some markets, but he said there was a dramatic drop-off in construction during the third quarter of 2024. Record levels of construction were planned about two years ago that are largely coming online now, Calanog said. He believes the softness in some submarkets will be short-term given the extreme housing shortage in the U.S.

“Demand continues to outstrip supply, and that will overcome the submarket softness we’re seeing now,” he said.

Retail performance has improved, so the only sector holding back CRE is offices. In the office sector, the biggest issue is that “so few transactions have taken place, so it’s difficult for investors to determine values,” Calanog said. The impact of return-to-office mandates remains to be seen.

Delve into more top trends shaping the multifamily market in Cushman & Wakefield and Greystone's Insights Magazine: 2025 Outlook.

The information provided in this article, including, without limitation, any opinions, predictions, forecasts, commentaries or suggestions, is for informational purposes only and should not be construed to be professional or personal investment, financial, legal, tax or other advice.