By: Head of Data Strategy at LightBox, Manus Clancy
A growing divergence between the equity and bond markets in August left market watchers torn regarding what comes next for the U.S. economy.
On the equity side, U.S. stocks continued their recent run extending their winning streak to four months with the major indexes all hitting new all-time highs at one point (or more). The impetus for the move has been, primarily that lower rates are coming. That notion was advanced by Fed Chair Powell’s remarks in Jackson Hole, suggesting that a rate cut might be coming. (The equity markets melted up following those remarks).
The extended four-month rally ignored plenty of potential potholes, to be sure: the potential for tariffs to trigger a new round of inflation and/or to weigh on U.S. corporate earnings; slowing U.S. job growth (see: July’s dismal labor report); record high U.S. debt; and a tapped-out U.S. consumer.
Those potholes were enough for bond investors to say, ‘not so fast.’ Bond yields, particularly at the long end of the curve, remained naggingly high. The yield on the 10-year bond, a critical benchmark for the CRE market, barely budged in August. That suggested that bond investors were not so blasé about the U.S. deficit and the potential for a new round of inflation.
We’ve been on record here and in our weekly CRE podcast as saying the equity markets feel frothy and the bond markets probably are a better barometer at the moment. Investors are discounting an awful lot of potential bad news while pushing stock prices higher and higher. Let’s not forget, last September, the Fed made its 50-basis point rate cut. Three months later, the yield on the 10-year was almost 100 basis points higher than at the time of the rate cut. There is no guarantee whatsoever that a September 2025 rate cut will move long dated Treasury yields.
Lastly, investors had to deal with one-last late August curveball. A federal appeals court ruled that most of the Trump administration tariffs are illegal. The ruling will almost certainly be appealed by the administration, likely on an expedited basis, to the Supreme Court. The immediate reaction of the equity markets was to sell off right after Labor Day. But how does an investor handicap this? With speculation rampant that $500 billion in collected tariffs could be rebated, what would be the fall out? Will bond investors now have to factor in even bigger deficits than originally, potentially pushing bond yields higher? Would a $500 billion rebate serve as a COVID-like sugar rush, pumping enormous money into the U.S. economy in one huge shot?
Those questions will get answered in the next 45 days, but in the meantime making any confident bets on the next moves for equities and bonds might take a stiff upper lip.
Despite Seasonal Dip, CRE Sales and Funding Show Strength
Whether or not this lack of clarity is stalling the CRE market remains to be seen.
Certainly, based upon various LightBox measures, we’ve seen a leveling off of CRE activity in July and August. The LightBox Activity Index, a measure of appraisals procured, new property listings, and environmental due diligence orders, ran up nicely in the spring but has since declined slightly. Some of that may be due to seasonality: property listings normally dip sharply in August as no one wants to list a property when half of the potential buyers are at the beach. September will give us a better gauge of whether or not the rebound in CRE is stalling.
That being said, there seemed to be no slowdown over the summer in property sales and developers had no problems accessing capital, even for the most capital-intensive projects. This bodes well for the CRE market going forward.
Even with that dip, property sales remained steady through the summer. Reported sales climbed week over week in July and August, with large transactions above $50 million continuing at an impressive pace. More anecdotally, headlines abounded of developers putting shovels in the ground for new projects or kicking off office to residential projects. Those stories usually came with confirmation that construction funding was already in place, signaling confidence from lenders that capital remains available even for more complex, capital-intensive projects.
Accordingly, we remain more upbeat on the CRE market than either the Treasury market or U.S. equity markets. CRE has already adjusted to higher-for-longer rates and demonstrated it can rebound without needing Treasury yields to fall below 4%. In contrast, U.S. equities appear vulnerable to a pullback and Treasury yields are likely to remain range-bound between 4.25% and 4.75% for the remainder of the year.
What Happens Next?
So, what are my predictions for the rest of 2025 for CRE?
- The July and August slowdowns in CRE activity will turn out to be a seasonal blip and activity will rebound starting in September.
- Valuation activity to remain level. While activity in 2025 has been strong compared to 2024, valuations have yet to move materially upward. That is a function of not just Treasury yields remaining elevated, but also higher insurance costs and growing inventory weighing on operators’ margins. We expect this trend to continue. While we predict sales activity to grow for the rest of the year, we don’t expect a meaningful uptick in valuations (no froth coming for CRE).
- The yield on the 10-year will remain above 4%, forcing CRE investors to contend with higher for even longer.
- There will be no CRE Black Swans. The market has already absorbed the worst from the office sector, with valuations down as much as 75% in some areas. It has also worked through much of the distress in multifamily, largely tied to syndicators who bought at peak pricing with floating-rate debt.
We’ll check back in January to see how these prediction age.
Game on.
—Manus
For more insights from Manus Clancy, subscribe to LightBox Insights and tune in to the CRE Weekly Digest Podcast, where he, along with Martha Coacher and Dianne Crocker, shares real-time data, market commentary, and key signals to watch across the CRE landscape.
