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After several years of tightening monetary policy, over the last four months of 2024, the Federal Reserve implemented three rate cuts lowering its rates to 4.5% by the end of the year. Despite these reductions, the market had already priced in these anticipated rate cuts, and loan rates remained higher than they were a year ago. Looking ahead, while the Federal Reserve is expected to continue reducing its rates, uncertainty remains regarding how the new administration’s policies will impact the market in 2025. The specifics of these changes are still unclear, but commercial real estate is positioned for improvements in 2025.
At year-end, demand for office space has improved but remained insufficient to turn net absorption positive, keeping vacancy rates at record highs. The retail sector remained tight due to limited new supply, whereas industrial vacancy rates have been steadily rising, leading to a slowdown in rent growth for industrial properties. Meanwhile, the multifamily sector continued to experience strong growth, with demand approaching the record-high levels seen in 2021.
Below is a summary of the performance of each major commercial real estate sector at the end of 2024.
Office Properties
Although net absorption for the office sector remained in negative territory, demand for office space has improved. The surplus of unoccupied office space has dropped significantly since the beginning of the year. In the first quarter, net absorption was -63 million sq. ft. compared to -18 million sq. ft. in the last quarter of 2024. Most of metro areas now report higher net absorption compared to a year ago. While many companies are shifting back to in-person work, demand for office space is expected to improve even further in 2025. In markets like New York, Philadelphia, Dallas, Austin, Sacramento, and Houston, net absorption has turned positive, with more square feet of office space leased than vacated. However, the office space sector still faces a long way to go for a full recovery. The national office vacancy rate remains at record highs.
Multifamily Properties
The multifamily sector continued its strong performance, with mortgage rates nearing 7% at the end of the year. Net absorption doubled compared to the previous year, exceeding 550,000 units. However, despite this robust demand for rental units, elevated completions and units under construction have increased the multifamily vacancy rate to 8%, with rent growth holding steady at around 1% over the past year. Looking ahead, rent growth could increase next year, as the pace of new deliveries is expected to slow.
Retail Properties
Retail space remains exceptionally tight, with available space for lease consistently below 5% over the past couple of years. Demand continues to grow, adding pressure to the market. Particularly as new supply remains limited. In the past 12 months, net deliveries totaled just over 30 million square feet – about 40% below the 10-year average. With fewer retail spaces under construction and strong consumer spending, the sector’s fundamentals are expected to remain tight.
Industrial Properties
The industrial sector continued to lose momentum at the end of the year. Net absorption was nearly 35 percentage points lower than a year ago, while rent growth decelerated significantly, dropping to 2.2% from 7.2%. With additional new supply, the vacancy rate also rose to 6.8% from 5.7%. However, further declines in inflation and interest rates later in 2025 may boost demand for goods and the volume of projects that were previously shelved or halted during construction. This usually creates a ripple effect, increasing the need for industrial spaces to manage production, storage, and distribution.
Hotel Properties
By the end of 2024, the hospitality sector remains stable. Hotel occupancy rates stand at 62.9%, still 2.9% below pre-pandemic levels due to the impact of remote work. Meanwhile, average daily rates and revenue per available room have exceeded pre-pandemic figures, showing a recovery in profitability.
