Although sentiment seemed to turn towards the positive in the first quarter of 2025, we’ve seen a dramatic about-face after the announcement of the new administration’s tariff and trade policies in April. As with the equity and bond markets, uncertainty has been the dominant theme in the real estate market. Investors have shown to be extremely hesitant to put capital to work without seeing a path forward through the tariffs and the eventual impact they’ll have on the US economy. Inflation expectations have risen, the Federal Reserve has remained committed to their more gradual path on rates, and the spectre of likely job cuts both in the public and private sectors has many investors in a wait and see mindset. In addition to the tariffs, concerns about the US fiscal deficit, the growing level of government debt, and the possibility of unfunded tax cuts has just caused Moody’s to downgrade the US government’s credit rating, the last of the 3 rating agencies to adopt this stance. The bond market has responded in kind and 10 year treasury rates are near 4.60% as of this writing, up near 100 basis points from September of 2024 just after the Fed started cutting rates.
The impact on our local commercial multifamily market has been clear. Cap rates have continued to rise, nearing 6% on average in Long Beach, while price per foot ($348 in Q1) and price per door ($258K in Q1) have fallen. We expect the 2nd quarter of the year to show further deterioration as active listings and new contracts are reflecting numbers even lower. After a surge of closings in Q4 of 2024 due to lower rates in Q3 and Q4, volume is back at cycle lows off by more than 50% from 2021. Inventory has also risen as higher interest rates have persisted now for 3 years and counting. Expiring fixed rate loans that were locked for 3 or 5 years in the low rate pandemic period are adjusting en masse as we enter the largest tranche of these in our local area of 5 year fixed financing that began origination in the Spring of 2020. Many owners, faced with the prospect of sizable equity injections just to keep a property with reduced cash flow have opted to list buildings for sale and the pressure of that additional inventory has weighed on price. The number of active listings for sale throughout the first quarter was up about 20% from the middle of last year.
While the news is certainly not positive for owners, we must acknowledge that sentiment has shown to be extremely fickle. The prospect of surprise trade deals, deregulation, the return of bonus depreciation, and a calming bond market could all very quickly shift demand upwards. Most industry analysts are calling a bottom now in pricing and expect fundamentals to improve and demand with them. It’s a tired saying, but those with the conviction to buy when others are fearful will be regarded as prescient once the dust settles and the bottom is in the rear view mirror.
