Colorado-Real-Estate-Journal_443738

Page 12 — Multifamily Properties Quarterly — February 2025 www.crej.com MARKET FORECAST E conomists are weighing the outlook for 2025 amid shift- ing interest rates, evolving inflation targets, and chang- ing labor market conditions. From the probability of a soft land- ing to concerns over potential black swan events, there’s a range of fea- sible scenarios for the coming year, and only time will tell. In a recent episode of the Brinkman Report, I welcomed Denver-based attorney Russell Hedman and entrepreneur Sasha Stern, and we discussed how these evolving economic conditions could impact the real estate sector. Drawing on our unique perspec- tives, we identified the many fac- tors at play and explored different ways of interpreting them as we forecast the coming year. n Interest rate and GDP outlook. My guests had differing perspec- tives on the direction of the 10-year Treasury yield by late 2025, and that seems in line with general market sentiment. One side argued that the 10-year Treasury yield could fall below 4% by 2025, mainly because staying above that level would put too much pressure on the economy (especially real estate markets) and force policymakers to step in with relief measures. This softer labor market could encourage multiple Federal Reserve rate cuts, or even quantitative easing, if gross domes- tic product growth remained strong but employment growth weakened, ultimately keeping inflation near current levels. On the other side, there's caution that persistent infla- tion could compel the central bank to hold the overnight rate steady, resulting in no cuts this year. Sustained infla- tion pressures and potential labor market constraints – especially in areas impacted by immigration policies and tariffs – might keep rate reductions off the table. n Real estate implications. A host of macroeconomic variables could ripple through the real estate market this year. Higher interest rates have already sidelined a lot of commercial deals, while ongo- ing uncertainty about future inter- est rates has deterred aggressive acquisitions. If the Federal Reserve initiates even modest rate cuts this year, we may see an increase in new development, but overall cost issues could offset these benefits. High tariffs on imported materi- als, alongside tighter immigration policies, could inflate construction labor costs and limit new construc- tion starts even further. Secondary and tertiary markets, which benefited from strong in- migration trends during and after the pandemic, have managed to absorb much of the new supply more readily. These regions con- tinue to see healthy demand for multifamily properties, partly miti- gating any negative impact from the historical highs of new product deliveries. In contrast, high-density urban areas are still completing projects approved several years ago and taking longer to deliver because of the size and scope of the proj- ects. These areas expect a sharp drop in starts for at least the next two years as financing challenges and cost pressures persist. This tapering of new supply, cou- pled with robust demand, will start to drive rents higher once again, which in turn is reigniting investor interest. With transactional activity slower in recent years, a significant amount of capital sits on the side- lines, poised to return to the mar- ket as soon as conditions stabilize. Despite the near-term hurdles of elevated rates and building costs, core fundamentals – such as solid population growth and pent-up capital – provide a supportive back- drop. As liquidity conditions and capital flows become more predict- able, the constrained pipeline will likely keep rental rates and property valuations on an upward trajec- tory, suggesting a recalibration that could offer more stability than the market has seen in several years. n Potential black swan. While most projections revolve around moderate growth scenarios, we’ve seen in the last few years that we’re not immune from unpredict- able factors that could disrupt the economy. A “black swan” event, by definition, refers to an extremely rare and unpredictable occurrence that carries a severe impact. Mov- ing into 2025, one such event could unfold in the insurance sector. Sig- nificant insurance market failures triggered by catastrophic events – such as wildfires or hurricanes – could prompt large carriers to exit Soft landings & hard truths: A forecast for 2025 Kevin Brinkman Founder and CEO, Brinkman Real Estate Please see Brinkman, Page 25 Sources: Marcus & Millichap Research Services, RealPage Inc.