Discover what you need to know about multifamily and commercial real estate investing in 2025. From shifts influenced by a new administration to interest rate projections, investment experts Peter Harris and Julia Sheehan share their analysis and predictions for the changing landscape. Don’t miss out on this insightful discussion packed with valuable insights and practical advice for commercial and multifamily real estate investors!
Key Topics Covered:
- Demographic Shifts: How Baby Boomers, Millennials, and Gen Z are shaping the commercial real estate market.
- Interest Rates: What to expect and how to plan your investments.
- New Administration Impact: Trump’s policies and their implications for real estate investors.
- Consumer Confidence: The optimistic outlook and what it means for spending and investments.
- Strategies for Success: Prioritizing cash flow, targeting distressed properties, and more.
2025 Multifamily and Commercial Real Estate Analysis
Peter: Welcome, everybody. This is Peter and Julia. Today, we’re going to share with you our top five predictions and forecast for commercial real estate and multifamily. Good morning, Julia.
Julia: Good morning, Peter. Thank you for having me again.
Peter: You are so welcome. You know, last year we did pretty good.
Julia: We did. We just missed one, I think.
Peter: Yep, you’re right. We missed one. And I think that one we missed is probably a good thing. We’ll discuss that a little later.
Uncertainty Brings Opportunity
Peter: I want to preface these predictions with a little bit of uncertainty. That uncertainty comes from a new administration coming in. It’s called national policy, so we’re going to have brand new policies on budget proposals, immigration, tariffs, tax laws, and deregulation. All that’s going to be brand new, and these are all interconnected and they are going to affect commercial real estate. So we’re just not sure; there’s a little bit of uncertainty. Julia, in my opinion, anytime there’s uncertainty, for those that are really attuned to the market, that spells opportunity.
Julia: It sure does. I can’t wait to talk about it a little bit more.
Shifting Demographics Driving Real Estate
Peter: Yes, absolutely. I’m going to get started here with our prediction number one, and I’ll break it down. That would be that demographics will tell a story this year. Let’s face it, this is numerical, empirical data that we can’t deny; the writing’s on the wall. We have 75 million baby boomers in this country. I’m one of them. We have 73 million millennials and about 70 million Generation Z’ers out there.
Commercial Real Estate Implications
So, my group, the baby boomers, guess what we’re doing? We’re older. Some of us are selling our properties, we’re exiting the business. I’m not, but some people my age are. They’re retired, they’re up in age, and they’re ready to go. We see that in our closings these last two years. A lot of our students who are buying deals are from the baby boomers. Our research shows that 75,000 baby boomers per day are exiting the business, retiring, and selling their properties or businesses. I think we’re going to see a lot of that today. The baby boomers are going to drive senior housing and medical office space, in my opinion. There is a correlation with multifamily too, that we’ll get into a little later.
Impact on Multifamily
Peter: Think about the 73 million millennials. Let’s lump the millennials and Generation Z together, like 140-150 million people in our country. They’re going to drive multifamily; they really are. They’re driving it because home prices are still high, and the interest rates are still really high. They can’t afford to buy a home.
Julia: It’s almost impossible.
Peter: So, they’re going to stay renters, and that’s going to drive multifamily. We’ll discuss that a little more today.
Julia: Exactly, and that brings me to my point too, of the housing supply and demand imbalance that we’re still going to see in 2025, right?
Housing Supply and Demand Imbalance
Julia: I think high interest rates are still going to linger. New construction, I want to talk about really quick, because there’s a lot of talk about it around the Trump administration coming in and how it’s going to boost new construction. But what I think is going to happen first is that we’re going to see it suffer a little bit because of high costs of building, high cost of borrowing money to build. We just can’t build fast enough to meet the demand. So, I think we’re still going to see a little bit of struggle there.
Multifamily Top Choice for 2025
But for multifamily in 2025, to your point, I think multifamily is going to increase in demand. Multifamily vacancies will decrease again. These millennials and Gen Z, they’re not going to be able to afford homes. They need to rent. Multifamily rents will increase along with the NOI. Increased rent, keeping expenses low, higher NOI, higher value, we know this. The end result is going to be that multifamily value just overall increases. That’s what I think is going to happen. But to my point about the interest rates lingering, I’m curious about your opinion, Peter. What do you think is going to happen with interest rates in 2025?
Peter: Well, here’s my thought on interest rates. But before we go there, I think what you’re saying—and you’ve managed over 3000 multifamily units at one point, so you know this market quite a bit—so you’re saying in 2025 multifamily is going to be probably your top choice, is that right?
Julia: I believe so, absolutely. And I think we saw that starting in 2024. We talked about that last year too, but I think we’ll continue to see that trend increase as well.
2025 Interest Rates and Market Impact
Peter: Now, onto interest rates. Here’s my opinion. I think we should expect to see a six in the interest rate throughout 2025. Today it may be 6.8, 6.9%. By the end of the year, it may be 6.2-6.3%. That’s my prediction. I want to read you something from Fannie Mae. Here’s Fannie Mae’s forecast, and they’ve been pretty accurate. It dictates that 2025 rates will be in line with the rates over the last decade. Now get this, since 1990, the 30-year fixed-rate mortgage has averaged 6%. Did you know that? The historic average is 6.72%. And many economists call six percent a balanced and healthy interest rate.
Julia: Interesting. So we’re actually good, I think.
Peter: For the general public, they’re looking at the federal funds rate. When we hear the feds reducing their rate, we think that it’s going to correlate to dropping the interest rate, and it hasn’t. And the reason why is we need to keep our eye on the 10-year treasury. Now it’s above 4%. As that drops, that’s where interest rates drop, and that’s where more people come into the market, and then that’s where deals get better because the interest rates drop. So, we need to keep our eye on the 10-year treasury, and right now it’s still pretty high. It hasn’t dropped along with the Fed funds rate. So this year, keep your eye on the 10-year treasury and not on the federal funds rate as it drops.
Also, on the interest rates, just one more thing. We shouldn’t expect the Fed to drop them significantly. I’ve heard some talks because of what you just mentioned, the tariffs, the budget proposals, things like that, it may cause inflation to rise a bit, so don’t expect interest rates to make any major moves in 2025 is my opinion.
Deal-Making Strategy for 2025
Now to me, with interest rates being static like that, it means three things for deal-making:
1. Plan for Steady Interest Rates
Peter: Number one is I think we should all recognize that when we do a deal in 2025, don’t do a deal anticipating rates dropping. Some people will get into a deal and say, “Peter, I’ll do this deal. And then 3 years later, I’m going to refinance at a lower rate.” Don’t do that anymore. That’s not going to happen. That’s dangerous.
2. Cash Flow Over Appreciation
Julia: We got to look at the cash flow these days. Got to focus on that.
Peter: And that’s point number two, cash flow over appreciation. You and I, we meet with students every single month on their properties, and we reinforce that cash flow is king, so the appreciation comes later. So when you think about it, if you focus on maximizing the income, reducing or controlling expenses, those two things give you the best NOI. If you focus on cash flow, guess what comes later? The appreciation. So, 2025 is the year for NOI, and we need to really focus on that.
3. Target Distressed and Underperforming Properties
Peter: The third thing is because interest rates are high, we should focus on distressed properties, underperforming properties, and properties that are maybe undervalued for some reason. The reason could be the interest rates were so high, insurance has gone up so much, property taxes have gone up so much, inflation has caused these apartments to run at such a high level of expense. These owners are distressed, so that’s an opportunity for us, for you out there, to find properties that are distressed, maybe underperforming and undervalued. I think interest rates being stuck at 6% is a good thing for those looking, because a lot of people, Julia, are still going to be on the sidelines waiting for the interest rates to drop. That means more properties for us, more opportunities for us.
Julia: Exactly. And I think historically too, we’ve focused on finding those types of properties, those types of asset classes of distressed value add. That’s what we teach our students. So, I think we need to market to those. We’ll probably put a bigger push on marketing to those in this upcoming year as well, changing up our marketing strategies to focus more on exactly those asset types you’re discussing.
Refinance Challenges in 2025
Peter: And speaking of those asset types, this correlates to the one thing we missed last year. I mentioned, 2025 is the year of focusing on distressed properties. A lot of this distress is from property owners who got a multifamily loan five years ago, and now it’s time to refinance. They can’t because their interest rates five years ago were 3%. This year it’s 6-7%, and they can’t refinance.
Last year, we thought this was going to really blow out and cause a lot of distress in the market. It didn’t happen. Some of it came out, but it didn’t come out like we thought, which I think is a good thing anyway. The last stat that I looked for 2025 is there are 250 billion in multifamily loans maturing in 2025. Over 6,800 properties. Can you believe that? That’s a lot of opportunity and some of that is going to come to us. Not all of it will be able to refinance.
I saw a lot of what we call ‘extend and pretend’. Those stressed go to the lender, ask the lender to extend their loan, and the lenders don’t want the property back. They work it out with the borrower, extend the loan, and pretend everything is okay. Those guys pretending better get their act together in terms of NOI because they need to pay off the lender soon. That leads us to your next topic, and that is consumer confidence.
Growing Consumer Confidence and Market Outlook
Julia: So, consumer confidence, I think, is huge to talk about today because ever since the new administration was voted in, and they’ll be coming in shortly here in January, there’s been a buzz in the air. You know, the economy’s got a little bit of a boost. People are a little bit less tight with their money. I’m seeing people going out to restaurants more. In the past, I hadn’t seen that.
So I feel people are a little bit more confident in what’s upcoming. With the consumer confidence, it’s currently at 111.7. That is based on the Conference Board’s Consumer Confidence Index. So that number, the 111.7, is pretty high, showing optimism in the economy. This is the highest it’s been in the last three years. And like I said, it’s just different now, so I feel like people are a little bit more comfortable spending money at this point.
New Administration: Policy Changes Impacting Investors
Julia: Talking about the new administration coming in, I want to just touch on the Trump deregulation and tax cuts that will be upcoming. So, here’s some good news. Whether you voted for him or not, Trump is a real estate guy, so he made his millions and billions in real estate development, real estate investing. For us as real estate investors, that is a great sign, that’s who we have in the oval office. I would argue that he knows more about real estate than any other elected politician that we’ve had. That is good news. I think we’re going to be seeing good movement in real estate.
Deregulation, Tax Cuts and Energy Policies
Julia: Is it all going to happen in one year? No, it’s going to probably take a couple of years to make some changes there, right? You recall him saying, “Drill, baby drill”. I think that eventually we’re going to see the interest rates come down because we’re going to see oil drilling coming back to our country. And then we’re going to see a reduction in the cost of energy. And eventually, that’s going to continue to trickle down, trickle down, trickle down. Hopefully lower interest rates at the end of the day, maybe by 2026? We’ll have to see. Having the majority of the House, Republican House, Senate, Supreme Court, it’s only going to help Trump push his agenda forward, as far as these deregulation tax cuts.
Bonus Depreciation
Julia: The other big one is the bonus depreciation, that one I’m really excited about. The bonus depreciation back in 2017, he had implemented this. It was to get 100 percent back on your depreciation, which is a huge help for a lot of us investors. That was supposed to be phased out in 2027. Now that he’s back in office, he has spoken about re-upping that, essentially making that a permanent part of his regulations.
Peter: That will be huge.
Julia: Right. I think that is going to help a lot of investors moving forward. And it’s going to encourage people even more now to continue to invest. Or, if you’re really watching the real estate market, it should push you to want to invest to take advantage of this.
Finding Deals: Strategies for 2025
Julia: That being said, I want to talk more about how we’re going to be finding deals. I touched on the marketing a little bit earlier on, what we’re going to be doing to find deals. So, in your opinion, Peter, what do you think we’re going to be doing for deal finding when it comes to 2025?
Market Uncertainty and Off-Market Opportunities
Peter: I have two thoughts on that. Number one, as I mentioned before, I think there’s a lot of uncertainty in the market, and that’s going to keep people on the sidelines with their capital, waiting to see what’s going to happen. As you and I know, that’s a big mistake. There are always opportunities out there. There may not be as much opportunity as in the good old days, but it’s always out there. So, I think as far as deal finding for those that are actively looking, you will find something. You just can’t give up. Deal finding will require some specialized knowledge that we apply, that we educate our students on how to find these off-market deals. So, I think 2025 is the year of the off-market deal. I really do.
Targeting Baby Boomers
Julia: And targeting boomers like you spoke about earlier.
Peter: That’s right.
Julia: You know, there are quite a few students that come to mind too, that have bought property over the last couple of years from baby boomers.
Peter: And again, as I mentioned before, the second part of this to answer your question is, a lot of these baby boomers, like, as we said, 75,000 per day, are exiting their business, whether it be a business, real estate, or single-family. They’re exiting, and a lot of that has come down, like you said, to our students, Darryl, Eric and Maria, and others. You and I, we do these closings every single month, and we know who the sellers are—their ages, demographics, and background. And I would have to say maybe the last quarter of 2024, it was 100 percent Baby Boomers. Very telling.
So, I think that will be a source of deal finding too, is anticipating the baby boomers to offload more of their properties as they age. Also, off-market deals and pocket listings are going to be the best way to find the best deals, in my opinion.
Julia: I couldn’t agree more.
2025 Forecast Wrap Up: Summary of Key Points
Julia: Let’s do a summary of everything that we just talked about. There are some really great points here.
- Shifting US Demographics: Our prediction is that US demographics are going to tell the story. Multifamily is going to be at the top of the line, ruling the market. Industrial warehouse will be shortly behind that, followed by self-storage, mobile home parks, and flex space. Multifamily and industrial warehouse are really going to be the top.
- Buy Cycle: The buy cycle is upon us. Now is the time to buy. Interest rates are going to stabilize. Six percent is actually a good interest rate, and market fundamentals have strengthened as well.
Peter: Yeah, market fundamentals are very strong these days. Rents are going up, vacancies are dropping in multifamily. The market fundamentals today are for you to get in and be rewarded five years down the road. So get in now. Be active.
- Growing Consumer Confidence: Consumer confidence is at its highest in several years, which should give everyone confidence. This is definitely going to trickle down to real estate property owners as well.
- New Administration: The new administration is going to favor commercial real estate investors and real estate investing in general.
- Deal Findings in 2025: Being on the sidelines is foolishness. The best time to have bought real estate is five years ago, and the second best time is today.
Peter: Absolutely. Don’t wait for the market to drop before you get in. If you wait 10 years, you will miss a huge opportunity. The market will have ups and downs, but over time it will rise. Commercial real estate is a long game. It takes years, but it’s well worth it. It changes lives. Look at our students’ lives that we’ve changed. They’ve been able to retire, put kids through college, and leave their jobs, all because they were patient and good operators. Pay attention to the NOI and then see the results.
Julia: It’s amazing to see what people have done with properties they bought with us five years ago. The numbers that we’ve seen are incredible, and I can’t wait to keep seeing them happen in 2025.
Peter: Absolutely. So Julia, there we have it. We have our top five predictions. Let’s see how we do next year in 2026, but I think we’re going to do pretty good again.
Julia: I think so too.
Peter: Well, thanks Julia for being patient with me and helping me put all this together. And everyone out there, thank you so much for joining us. Julia and I wish you the best for 2025!
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