The Latest Data, News, and Analysis Impacting the Commercial Real Estate Market
Every week, LightBox carefully selects the week’s most impactful economic news, market metrics, in-house data and analysis, and transactions shaping the CRE industry.
In This Week’s Edition:
- The Fed delays 4th interest rate cut at first meeting of the year
- Did AI upstart DeepSeek upend enthusiasm for data center investment?
- LightBox releases CRE expert predictions for 2025
- Personal consumption expenditures price index rose in December
- LightBox analysis points to encouraging price stabilization in Chicago office market
- Fed delays 4th interest rate cut at first meeting of the year
After three consecutive interest rate cuts since September 2024, the Fed left rates unchanged at its first meeting of 2025. Fed Chair Powell struck a slightly more optimistic view on the labor market and stressed the momentum of economic growth while noting that the central bank would need to see “real progress on inflation or some weakness in the labor market before we consider making adjustments.”
The LightBox Take: With the Fed in no rush to lower rates until such a move is supported by data, the market is pricing higher-for-longer rates into loans and transactions. For the year, markets are pricing in a funds rate of about 3.9% by the end of 2025, which suggests a 61% probability of two quarter percentage point cuts this year. Much depends on federal policies that could have inflationary implications, potentially discouraging the Fed from making further rate cuts.
- Did AI upstart DeepSeek upend enthusiasm for data center investment?
Chinese AI firm DeepSeek disrupted the AI industry with claims that its new R1 model outperforms OpenAI’s latest o1 model and at a fraction of the cost. The news sparked investor fears and erased close to $600 billion from Nvidia’s market capitalization early last week—the biggest single-day drop for any company in U.S. history. President and COO John Gray of Blackstone, a firm that has $80 billion of leased data centers, was sanguine in the firm’s earnings call, observing that “DeepSeek says to me the cost of compute is going to come down a lot. Therefore, the usage of AI and adoption will go up.”
The LightBox Take: While this development is potentially a positive step forward for the AI industry as a whole, it also has potentially serious implications for companies making billion-dollar investments in data centers. DeepSeek’s launch has triggered scrutiny from investors, who are expected to analyze tech giants’ AI spending plans closely in the next few weeks.
- LightBox releases CRE expert predictions for 2025
In the LightBox CRE Expert Predictions 2025: Driving the Recovery, Full Speed Ahead, LightBox shares five predictions for lending, investment, 10-year Treasury yields, interest rate cuts, and the LightBox CRE Activity Index. The forecasts are based on input from subject matter experts on two Market Advisory Councils in capital markets and environmental due diligence. Based on a slower-than-expected 2024, the report points to 2025 as a year of transition. The forecasts come with a long list of caveats given how much depends on unknowns like the impact future federal policies could have on tariffs, inflation, and the labor market, among others, but in general, Council Members are seeing the market move in a way they didn’t see last year. There will be more opportunities, but capital will be selective.
The LightBox Take: The predictions forecast moderate growth, mostly late in the year, and are in line with the CREFC Sentiment Index that also came out last week. Despite rates cuts on hold, 95% of finance council members are expecting at least a 10% increase in transaction volume. The LightBox Expert Predictions report is forecasting a 15-20% increase in transactions and a 25% increase in CRE lending next year as investor demand and borrower financing needs increase over the course of the year.
- PCE points to slight acceleration in December
In the latest inflation report out last week, the Fed’s preferred measure, the PCE Index, matched economists’ forecasts with a slight acceleration from 2.4% in November to 2.6% in December. Core PCE, which excludes volatile food and energy prices, rose 2.8% year-over-year, as forecast, and was in line with November’s reading. The PCE data came on the heels of GDP data last week showing an acceleration at a 2.3% annualized pace in Q4. Although analysts were expecting a more robust 2.5% increase, it still marked a healthy pace to close out 2024.
The LightBox Take: Two weeks ago, the latest CPI print showed consumer prices rising by only a very modest 0.4% last month above November levels, bringing the annual rate to 2.9%, while the PPI rose a slim 0.2% in December, less than the 0.4% increase of the prior month. Inflation metrics will be closely watched as the Fed’s next meeting approaches in March. Any evidence that prices are moving higher and further away from the 2% target will make further cuts unlikely.
- LightBox analysis points to encouraging price stabilization in Chicago office market
An analysis by LightBox provides compelling and encouraging evidence that office pricing in major metros is stabilizing. Although office valuations have tumbled by more than 50% over the last 30 months, office sales are taking place at a healthy pace in many U.S. cities. Looking at 30 recent office sales in the Chicago CBD, the average sales price per square foot has been $75. However, excluding the two major mixed-use property sales where the retail component is highly valued, the price per square foot drops to $71. And notably, in about half of the sales, this average clustered between $54 and $89 per square foot.
The LightBox Take: The data supports that prices in Chicago as well as other major central business districts (CBDs) are stabilizing. This comes as a welcome sign to investors looking for signs that the office sector has bottomed out, particularly in stronger markets and better-quality buildings. In another encouraging sign that office could be turning the corner, listings in the LightBox RCM platform for office properties spiked 21% in Q4 versus the corresponding quarter of 2023. The Wall Street Journal referenced the recent uptick in office sales as a “budding buying spree.”
There’s a growing sense that the worst is over for the global office market after a prolonged slump fueled by the pandemic, said Blackstone’s President Jon Gray said that Blackstone is now evaluating fresh office bets. The firm is nearing an agreement to purchase a Midtown Manhattan tower. Valuations for U.S. offices have tumbled 50% to 70% from their peak, he said, and they’re poised for a rebound.
Important dates and industry events this week
- Monday, February 3:
- ISM Manufacturing PMI, construction spending
- Tuesday, February 4:
- Job Openings and Factory Orders
- Wednesday, February 5:
- U.S. ADP Employment Change, U.S. trade deficit
- Thursday, February 6:
- Weekly jobless claims
- Friday, February 7:
- U.S. employment report
Did You Know of the Week
Did you know that the latest output from the LightBox ScoreKeeper model shows that 2024’s top growth markets for Phase I ESAs were Atlanta, Vegas, and Dallas? Dallas and Atlanta are also the 4th and 5th biggest Phase I ESA markets in the country so they’re delivering a combination of strong growth with high activity levels. The rest of the top 10 were smaller secondary metros like Charlotte and St. Louis, which reinforces an observation made by CBRE’s Spencer Levy on the CRE Weekly Digest that submarkets in secondary metros are driving a lot of today’s investor interest.
For commentary on these CRE developments and more, tune in to the LightBox CRE Weekly Digest podcast.
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