State of Play in 2025
Everyone can speculate about what will happen in 2025. Some of us will be right, most of us will be wrong. I’m basing my analysis on historical data (As Winston Churchill said, “The farther backward you can look, the farther forward you can see”) and my operating history since 1997 (being broker of record on over 10B in trades and investing over $500mm in CRE since 2011).
Here are some of my thoughts and predictions:
Interest Rates and Treasury Demand
The Federal Reserve, policymakers, and “Washington” cannot directly influence free-market demand for Treasuries. As a result, Treasury demand is likely to remain soft, contributing to a sustained high-rate environment. “High for longer” will remain the word on the street. I wouldn’t be surprised if the 10-year Treasury yield hovers in the high 4%, if not low 5% range throughout the year and perhaps thru late 2026. Unless DOGE really addresses our swelling national debt and creates actionable measures to reduce government spending, our US treasuries will remain less compelling to the market.
The Lending Environment
Despite elevated interest rates, we’ve seen lending spreads moderating, as banks maintain relatively strong balance sheets, bolstered by regulatory frameworks and macroeconomic stability. This is providing some relief for CRE lending, ensuring liquidity doesn’t entirely dry up. That said, as long as we remain in a high-for-longer environment, borrowers will likely continue to wait until the last minute to refinance. This will continue to make financing CRE challenging based on current market pricing.
Investor Sentiment and Equity Allocation
As we actively fundraise equity daily for The Broadway Company and BRA clients, spanning high-net-worth individuals to institutional investors, we’ve observed a consistent recent trend: Equity is seeking a minimum 200 bps spread over the 10-year Treasury on current pay distributions. While some capital will accept lower returns, the general appetite for common equity CRE remains soft unless the deal is particularly compelling. This dynamic is likely to continue to suppress sales volume, as deals won’t pencil out and owners will hold on as long as they can, hoping for capital markets to moderate.
Greater Boston CRE Fundamentals Remain Compelling
For our part, Greater Boston remains one of the strongest markets nationally for CRE investment. Significant barriers to entry for new development have historically been a saving grace for this market and continue to be. Demand drivers from the meds and eds sectors remain robust. These compelling factors ensure that both private and institutional capital will continue placing bets in 2025, taking the “negative leverage pill” in hopes of improved capital markets in 2026. Look for transaction volume to have slight increases YOY from 2024 to 2025.
Operating Expenses on the Rise (The Boogeyman)
Rising operating costs pose another significant headwinds. Municipal taxes continue to climb (we dodged a bullet here in Boston, let’s all thank Nick Collins for standing up for the industry) particularly in major cities, with little sign of relief. Additionally, the insurance market remains soft, leading to higher premiums that further compress net operating income (NOI).
2025: A Grind, But Opportunities Exist
The mantra “stay alive until 2025” has resonated across the real estate industry, reflecting the resilience required to navigate recent challenges. However, the grind will persist throughout this year. Opportunities still exist for those who remain disciplined, creative, and well-capitalized.
In short, 2025 will require patience, adaptability, and a strategic approach to capitalize on selective opportunities amid ongoing market weakness and some uncertainty.
