June 2025
June Newsletter: Economic and Real Estate Outlook
Economic Outlook: Slower growth and renewed inflation are anticipated in late 2025 due to tariffs and policy uncertainty, but a recession is not expected.
Policy Shifts & Future Rebound: Policy adjustments by late 2025 are predicted to fuel a stronger economic rebound in 2026.
Commercial Real Estate (CRE) Capital Markets: Increased investor confidence, driven by improved buying conditions and stable debt costs, is expected to boost transactions.
Interest Rates
The FOMC maintained the overnight lending rate at 4.25% in June, holding steady for six months. This reflects confidence in a strong labor market and stable inflation. A rate adjustment is unlikely until these metrics weaken, however some believe July could see a reduction.
Property Type Implications
Retail Property: Consumer spending at physical stores is slowing, though personal and health products show strong growth, benefiting unanchored strip centers. Despite a slow start to 2025, years of underdevelopment ensure strong backfill potential for well-located retail.
Industrial Property: Surging online sales (22.1% of core retail receipts) are driving demand for distribution space. Industrial vacancy is rising at its slowest pace since 2022, with over 100 million square feet of net absorption projected for 2025.
Hotels: Declining airline and hotel rates indicate softer travel demand. Limited-service hotels are impacted by financial pressure on lower-income households, while full-service hotels perform steadily, supported by business and wealthier travelers.
Medical Real Estate: Elevated medical care inflation supports healthcare real estate, as providers pass on higher costs. Q1 2025 saw the highest quarterly gross absorption for medical office and senior housing since mid-2022.
Student Housing: This sector is a leading area for institutional lending due to stable cash flows and strong rent growth. Lenders (agency, direct banks, life insurance companies, and debt funds) are aggressively increasing funding, creating an optimal financing window.
Developing Trends to Watch
Tariffs: The full impact of U.S. trade policy and tariffs exceeding 15% is yet to be fully felt, suggesting potential future price increases.
Middle East Conflict: Escalating tensions, particularly concerning the Strait of Hormuz, pose a significant risk to the global energy market and could lead to higher oil prices and U.S. inflation.
Inflation & Real Estate Demand
Overall Inflation: May's CPI showed a modest 0.1% month-over-month increase, bringing the annual rate to 2.4%. Services inflation (up 0.3% monthly, 3.6% annually) remains the main driver, with categories like insurance and medical care showing price increases.
Regional Inflation and Multifamily Housing: Inflation varies geographically, with coastal markets like the Northeast (2.8%) and Pacific region (2.7%) experiencing more persistent price pressures. This may encourage migration to more affordable Sun Belt and Midwest metros. The Midwest, with limited development, is well-positioned for continued rent growth (4.1% annual increase as of March).
Pet and Daycare Services: Consistent demand for these services, with an 8.5% year-over-year increase in personal care spending in April, supports leasing at neighborhood and service-oriented retail centers.
Housing Market Trends
Multifamily Housing Starts: Overall U.S. housing starts fell by 9.8% in May, mainly due to a 29.7% monthly drop in multifamily production (332,000 units, the lowest in six months).
Single-Family vs. Multifamily: While single-family starts had a slight monthly increase, they are down 7.1% year-to-date. Multifamily starts are up 14.5% year-to-date, suggesting more homebuyers are opting out of single-family purchases. Multifamily also had more construction permits issued in May.
Disappointing Spring for Single-Family: The spring housing market was "disappointing" for single-family homes due to high mortgage rates, affordability issues, and economic uncertainty. A decline in single-family starts is predicted for the rest of 2025.
Millionaire Renters: The number of millionaire renters has tripled since 2019, growing faster than millionaire homeowners.
Surge in Millionaire Renters: From 2019-2023, renter households with incomes over $1 million increased from 4,500 to 13,700, driven by stock market gains, tech sector expansion, remote work, and a preference for "turnkey" living.
Shifting Hotspots: While traditional luxury rental markets remain popular, Southern metros like Houston, Dallas, and Miami are emerging as new hotspots.
Generational Divide: Millennial millionaires are more likely to rent, prioritizing flexibility, while Gen X millionaires tend to own.
Reasons for Renting: High mortgage rates and limited luxury inventory (due to the "lock-in effect" from low-interest mortgages) are pushing high-income individuals to rent. Many prefer to invest capital elsewhere.
Housing Affordability for Home Buyers: Renters now outnumber homeowners in 203 suburbs across the 20 largest U.S. metros, with 15 becoming renter-majority in the last five years. This shift is driven by high single-family home prices and elevated mortgage rates (average 30-year fixed loan rate is just under 7%). The increase in rental properties, including single-family rentals, makes suburban living more accessible for those who cannot afford to buy.
California Landlords Seek Recourse for Pandemic Eviction Moratorium Losses
California's COVID-19 eviction moratoriums protected tenants but burdened landlords. Many received little state rent relief, incurring substantial losses. The California Rental Housing Association (CalRHA) sued the state, arguing an unlawful "taking" of private property. Though that case was dismissed as moot, a recent federal appeals court ruling (7-3) offers new hope. This ruling states that the U.S. government must face legal claims from landlords seeking compensation for losses incurred during the CDC's 2020-2021 eviction moratorium, agreeing that landlords could sue under the Fifth Amendment.
