The last couple of years have been tough for capital markets – everyone can agree with that. However, now that we are into the second month of 2025, there seems to be a sense of cautious optimism in the commercial real estate industry. Our SRS capital markets team has started to see activity pick up across our single-tenant net lease and multi-tenant retail property listings, including a notable uptick in offer activity over the past few weeks.
Anecdotally, there have been some listings that initially had limited buyer interest and are now receiving multiple offers close to the asking price. In many cases, properties that have been slower to transact in the current market are not the result of a pricing issue; it is more of a smaller buyer pool issue. The good news is that 1031 exchange inquiries are picking up steam, and we believe that we'll see more transaction velocity in 2025 in other CRE property types, which will lead to more 1031 exchange volume.
Meanwhile, inflation seems to be moderating as the last Personal Consumption Expenditures (PCE) reading showed a 2.8% increase YoY, in line with expectations. The 10-year treasury yield closed recently at 4.5% and interest rates have generally been in the 6.25% to 6.50% range for permanent debt. This means that for lenders to hit their debt-service coverage ratio they require at least 50% down payments from buyers for newly constructed STNL deals. Most of our buyers are faced with negative leverage if they were considering financing and this environment is still affecting capital markets transactions in general.
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Any market participants involved in capital markets seem to be adjusting to this new normal of interest rates and most of our contacts in private equity, M&A, etc. are saying they are looking at their biggest pipeline in years. This should lead to more windfall events for investors which has a trickle-down effect on the properties that we are selling.
We are also starting to see some passive investors start to trade out of treasuries, CDs, bonds, and high-yield savings, and consider investing in NNN with the proceeds. This type of buyer was practically non-existent in the past couple of years. We are also receiving more calls from international buyers looking to reposition holdings in the U.S.
There are still a lot of questions regarding this new administration's policies, including to what extent Trump's tariffs get imposed and whether this will create inflationary pressures, which could lead to interest rates staying at elevated levels. Trump's new tax policy proposals are anticipated to reduce corporate taxes, preserve 1031 exchanges, and potentially bring back bonus depreciation for qualifying properties. The good news is that generally, this administration favors the commercial real estate industry and it is worth noting that property values increased 18% over Trump's first presidential term.
William Wamble is Executive Vice President - Capital Markets, SRS Real Estate Partners
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