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 noteworthy transactions shaping the CRE industry.
In This Week’s Edition:
- President Trump urges Fed to cut interest rates at January meeting
- Leading economic indicators slip in December, January rebound expected
- January retail closings continue 2024’s upward trend
- Trump orders employees back to office, but also considers major office selloff
- LightBox survey reveals growing concerns about PFAS risk in CRE
- Trump urges Fed to cut interest rates at January meeting
Last week, during his speech at the World Economic Forum in Davos, Switzerland, President Trump called for immediate interest rate cuts, citing lower oil prices. The Federal Reserve, which meets later this week is widely expected to maintain current rates. The central bank last cut rates in December, lowering its target to 4.25%-4.5%, bringing total 2024 rate cuts to 100 basis points. Policymakers remain cautious about further cuts due to persistent inflation and uncertainty around Trump’s proposed trade tariffs and immigration policies, which could reignite price pressures.
The LightBox Take: The president’s remarks break with the tradition of presidential non-interference in Fed policy and have sparked debate about the agency’s independence. Powell’s term ends in 2026, and legal uncertainties surround his potential early removal. Prior to Davos, fixed income markets were projecting a 99.5% chance that interest rates would hold steady at their current level of 4.25% to 4.5%, but roughly an even chance of a cut at one or both spring meetings in March and May.
- Leading Economic Index Slips in December, January Rebound Expected
Just-released economic indicators tracking the health of the U.S. economy lost steam at the end of December, reversing the post-election boost of November. The Leading Economic Index (LEI) published last Wednesday by The Conference Board dropped 0.1% in December, following a 0.3% increase in November. Lower consumer confidence about future business conditions, still relatively weak manufacturing orders, an increase in initial unemployment claims, and a decrease in building permits contributed to the decline. Still, half of the 10 components of the LEI contributed positively in December, including the stock market contribution.
The LightBox Take: The December report was in line with economists’ expectations based on market volatility and growing concerns about inflation and future federal policies on tariffs, immigration, and deficit spending. In the latest LightBox CRE Weekly Digest podcast, Ryan Severino, Chief Economist at BGO, observed that “there are a lot of shoes left to drop” and the direction the president takes on tariffs could have implications specifically for the industrial and retail sectors, as well as on inflation. Highlighting the wide range of possible outcomes, Severino noted that “when you use tariffs intelligently, it should be more like a scalpel, but if you use them like a broadsword, then you will create a lot of collateral damage, and all bets are off at that point.”
- January retail closings continue 2024’s upward trend
In 2024, as the result of changes in consumer behavior post-COVID and high debt levels, the number of U.S. store closings reached their highest levels since 2020. January continued that trend with the first sizable uptick in a few years. Macy’s delivered the biggest jolt to the market with its announcement of closing 66 stores, largely furniture stores and locations in Class B/C malls. The move is the first round in Macy’s three-year strategy of shuttering 150 “underproductive” stores. In related news, Kohl’s just announced plans to close 27 stores and one California fulfillment center.
The LightBox Take: While industrial and multifamily get most of the attention, investors are increasingly taking notice of opportunities in the retail sector. Post-COVID, retail’s record-low vacancy rates and limited supply in many markets have driven robust rent growth, supported by strong consumer spending. Grocery-anchored retailers are in expansion mode, and demand is high for open-air shopping centers, strip malls, and live-work-play developments. More store closures and bankruptcies in 2025 will open new opportunities for investment and occupancy for expanding retailers or adaptive reuse of older retail centers.
- Trump Administration orders employees back to office, but also considers major office selloff
The first few days of the new Trump Administration brought two seemingly incongruous developments: a federal government back-to-office mandate and a divestiture of office properties. Joining the ranks of major companies like Amazon and JPMorgan Chase, President Trump issued a directive to the heads of federal departments and agencies to require full-time employees back to the office. And in a move that could have significant implications on the DC office market, the Administration is also now considering selling two-thirds of the federal government’s office stock to the private sector and canceling about three-quarters of the 70 million square feet of office space leased from private landlords. The Government Services Administration (GSA) manages a portfolio of federal buildings consisting of 370 million square feet nationwide, many of which are vacant or underutilized post-COVID. GSA-owned buildings in Washington, D.C. average a 12% occupancy rate. Many of the office buildings were built in the 1970s and after years of poor maintenance, would require significant capital expenditures to upgrade before they could be leased out to new tenants.
The LightBox Take: If the selloff happens and federal office buildings are sold at a discount, it could trigger a dramatic shift in the already-declining office property values in D.C. Office landlords in DC are challenged by low occupancy rates post-COVID, although 2024 ended on a high note with the first increase in office leasing velocity in 10 quarters. An influx of old, outdated office stock could be met with interest from developers eager to redevelop the outdated buildings to meet growing demand from government or law firm tenants looking for Class A space especially as return-to-office mandates are enforced.
- PFAS survey reveals growing concerns about PFAS risk in CRE
The latest in LightBox’s three-part series focused on our benchmark survey of environmental due diligence professionals highlights the increasing impact that PFAS is having on today’s CRE deals. PFAS risk is getting more attention after the U.S. EPA designated perfluorooctanoic acid (PFOA) and perflurorooctanesulfonic acid (PFOS) as hazardous substances under CERCLA early last year. In response, environmental due diligence consultants are more routinely addressing PFAS risk as a standard part of Phase I environmental site assessments for their lender and investor clients. The survey results indicated the nearly 30% of consultants are flagging PFAS risk as a Recognized Environmental Condition (REC) in their Phase I ESA reports, much as they would the presence of a dry cleaner or gas station on or near a subject property. Additionally, 30% of respondents indicated that PFAS risks have already impacted CRE deals, and even killed deals outright due to concerns about PFAS risk.
The LightBox Take: The survey results demonstrate that the environmental consulting community is adopting standard practices following the EPA’s designation of certain PFAS as hazardous substances that recognize the risk as a recognized environmental condition. As a result, more investors and lenders will be responding to the potential risk exposure of lending on a property—or investing in one—that may have PFAS contamination and present the potential for financial risk. As PFAS awareness grows and new policies and procedures take share, there will be more widespread consensus on PFAS assessment, testing, and mitigation.
Important Dates and Industry Events This Week
- Monday, January 27:
- Home sales
- Tuesday, January 28:
- Consumer confidence
- Wednesday, January 29:
- Federal Reserve’s first 2025 meeting
- Thursday, January 30:
- GDP-first release
- NAR Pending Home Sales Index
- January 27-30:
- National Multifamily Housing Council in Las Vegas
Did You Know of the Week
Did you know that 40% of LightBox’s Environmental Due Diligence Market Advisory Council members expect Q1’25 activity to be higher than Q4? The volume of Phase I ESAs is a leading indicator of CRE investment and lending activity given that site assessments are typically conducted before loan originations and property transactions. In a promising development, council members report that clients who were in wait-and-see mode for much of 2024 are beginning to re-engage and reinvigorate projects that had been on hold.
For commentary on these CRE developments and more, tune in to the LightBox CRE Weekly Digest podcast.
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