Turning the Corner? Commercial Real Estate Themes for 2025

Economic

Summary:

How to unlock value in a complex market landscape?

As major central banks lower interest rates, is the prolonged and painful downturn in commercial real estate (CRE) finally coming to an end? Yes, at least in some sectors, according to senior investors from PIMCO’s commercial real estate platform. In a recent roundtable discussion, they emphasized that recovery will likely be slow and uneven, requiring a strategic focus on specific geographies and sectors, along with a considered choice between debt and equity investments.

Q: The commercial real estate market has been at an impasse throughout much of 2024. Looking ahead, do you believe the market will finally turn the corner in 2025?

John Murray (managing director, global private commercial real estate): Yes, there appears to be more willingness to bring transactions to market following the September rate cut by the Federal Reserve. We are seeing some green shoots, particularly in core transactions in the multifamily sector, and redemptions in core open-end funds seem to be slowing.

That said, I don’t expect a sharp rebound in 2025 similar to what occurred after the global financial crisis (GFC). During that period, the industry was aided by a plethora of Federal Reserve programs, including quantitative easing, which led to a dramatic decline in capitalization rates.

Although the Fed has finally begun to cut rates, we don’t expect long rates to fall anywhere close to 2021 levels. Thus, cap rates should remain elevated relative to 2021, and this, along with the growing wall of maturing CRE loans, suggests the thawing process will be prolonged.

Russell Gannaway (managing director, alternative credit): I agree that we should see increased activity and a trend toward recovery next year. Public markets already indicate that we are farther along the route to recovery than private markets suggest. For instance, valuations for equity real estate investment trusts (REITs) and collateralized mortgage-backed securities (CMBS) are approaching 2021 levels. While public markets could be wrong, I believe we will start to see private markets catch up next year.

François Trausch (managing director, PIMCO Prime Real Estate): Investors should keep in mind that in Europe, unlike in the U.S., interest rates were negative or close to zero from 2009 to 2022, and most market players got used to this. So while rates are coming down, they are not likely to reach levels anywhere close to what we saw after the GFC. This requires a significant change in mindset: In our view, investors should not rely on low rates or decreasing cap rates, but focus instead on pockets of growth where rent and net operating income (NOI) will increase. This transition will take time.

That said, while we don’t expect substantial growth across Europe, we can reasonably expect growth in Asia, which could help markets recover more quickly.

Q: Have valuations bottomed out?

Gannaway: Valuations are in the process of bottoming out, if they have not already done so. I would say this is the case in certain areas.

Seray Incoglu (executive vice president, global private commercial real estate): Class A buildings have likely bottomed out, with some selling below replacement cost. However, Class B and Class C properties, particularly in sectors such as office and life sciences, still have room to decline. Delinquency rates and maturity defaults are marginally elevated, but this may not fully reflect the extent of the distress. For example, delinquency rates for CRE collateralized loan obligations (CLOs) have increased to 7% from less than 1% before the pandemic. CRE issuers are taking back defaulted loans at par, likely masking some underlying issues still facing the market.

Murray: To quantify, we believe liquidation values have hit bottom, having fallen 20%–40% from their peak. Recent core-focused transactions traded at 20% to 25% discounts to 2021 levels. Interestingly, the NCREIF Open End Diversified Core Equity Index suggests U.S. CRE values have only fallen 16%, so we probably have a bit more to go, at least as it relates to formal indices such as this one.

Trausch: To the extent investors hold on to assets and forced sales are limited, we are at the bottom, at least according to the valuation companies. However, if we see a pickup in forced sales – and there is good reason to believe that could happen – valuations could face further pressure. Remember, the pretend-and-extend practices that followed the GFC could be justified at the time because rates came down quite quickly. But now, if rates fall more slowly, it becomes less justifiable for lenders, especially banks, which are growing more impatient with defaults and their impact on capital charges.

Q: What factors do you think the market is currently underappreciating or overestimating?

Trausch: Rates are declining in Europe, but for the wrong reasons – specifically, low economic growth prospects, particularly in Germany and France, although growth remains stronger in Spain and Italy. In addition, the market’s newfound excitement about office properties may be overdone. While institutional investors will hang on to their best properties, it’s important to remember that well-located offices and those with alternative uses represent only a small segment of the market. Tenants are becoming more discerning, favoring higher-quality, more sustainable assets. This trend presents an opportunity for both owners and lenders to upgrade properties to core-plus status. But it also highlights a risk for weaker properties, which are likely to continue facing declining occupancy over time.

Gannaway: I agree. There is no benefit to being early to this party. Remember that Class B and C malls took 10 years to transition to alternative uses. Furthermore, I don’t think the market fully appreciates how slowly and carefully the Fed will reduce rates.

Murray: Likewise, I think the market is overestimating the significance of the recent rate cuts on valuations. Lower short-term rates are like a bandage: They reduce the bleeding but don’t necessarily cure the wound, which is higher cap rates.

Incoglu: The market may also be overlooking how regulatory pressures on capital are driving a secular downshift in bank lending. Despite recent signs of improvement in bank lending conditions, the focus of banks has been and will remain on core assets, maintaining lower leverage, generating income from products such as deposits and investment banking fees, and creating opportunities for alternative lenders.

Q: In our Real Estate Outlook in July 2024, we indicated a preference for debt over equity Investments in real estate. Does that inclination still hold?

Murray: Yes, it’s still an attractive time to be a lender across the risk spectrum. Interest rates remain elevated, and property valuations and business plans have been disrupted given the weak economic backdrop. In particular, we are seeing a lot more opportunities on the higher end of the risk spectrum for rescue capital and gap financing.

Trausch: We previously said, “Go broad in debt and stay narrow in equity.” While this remains true overall, we believe the market now presents a more attractive entry point for long-term equity investors than it did even six months ago, as liquidation values bottom out and supply pressures subside. That said, investors should remain disciplined and highly selective.

Q: What are your highest-conviction views regarding where and how to invest?

Gannaway: I continue to gravitate to the residential sector, which is underpinned by strong long-term supply/demand dynamics. In the U.S., we anticipate a housing shortage over the next five years, which will have clear implications for sustained or growing demand for build-to-rent strategies, as well as for existing single-family and multifamily properties. While there are still some near-term supply challenges, over the long run we believe it’s the right place to invest, with the Sun Belt being a great example of this.

Trausch: We should pay attention to the residential sector, but as Russ said, it’s essential to be discerning and identify the right pockets of opportunity. Another one of these is multifamily housing in Japan, where household formation is still increasing in big cities such as Tokyo and Osaka, tenant delinquency is rare, and financing conditions are attractive.

More generally, student housing has shown strong rental growth – not only in the traditional markets of the U.S., the U.K., and Australia, but also in continental Europe and parts of Asia.

Murray: Data centers remain at the top of my list, particularly in Europe. Demand continues to grow globally, but we believe in the convergence story in Europe, which is five to seven years behind the U.S. in data center capacity relative to its population. The gap is underpinned in part by digital sovereignty regulations, which require countries to retain critical data, software, and hardware within their borders.

Incoglu: I would be remiss not to flag sectors where we are exercising greater caution. During and immediately following COVID-19, the life sciences sector became highly sought after for both investment and development. However, net absorption has shown signs of deceleration in recent quarters due to new supply and reduced tenant demand in several markets. That said, select operators in specific markets are well-positioned to navigate and overcome current market challenges.

Q: Any parting thoughts?

Incoglu: This cycle will not unfold like any previous one. This alone will create volatility and tactical trade opportunities, particularly in public markets. As such, investors should consider how they might allocate across all four quadrants – public and private equity, and public and private debt.

Gannaway: There remains a clear gap between public and private markets that must close in one direction or another. The ability to accurately assess relative value – whether in public or private markets, or in determining where to invest across the capital stack – will likely be the skill set that separates the winners from the losers in 2025.

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading. Following any strategies or investment methods may lead to potential losses. The content on the site is provided by our contributors and analysts for information purposes only. You are solely responsible for determining whether any trading assets, securities, strategy, or any other product is suitable for investing based on your own investment objectives and financial situation.

Add to Favorites

Cohen

Cryptocurrency

Economic

Crypto was once a fringe sideshow for the investing public, a concern for D.C. policymakers and a subject of ridicule for top Wall Street figures.

That changed in 2024.

Digital assets such as bitcoin (BTC-USD) can now be owned and traded by regular Americans like a stock. Some of the biggest players on Wall Street are hailing it as a wise investment. And an incoming administration in Washington, D.C., is promising major legislative changes to support the industry.

Crypto's widespread acceptance translated into major gains for investors who were along for the ride.

Those holding bitcoin are up 126% since the beginning of the year as the price of the world’s largest cryptocurrency set new records and surged past $100,000 following the election of Donald Trump. The market value of all crypto swelled by nearly $1.7 trillion, according to Coinmarketcap.

"It's all lining up for the crypto industry right now," Ian Katz, a managing partner with Capital Alpha, told Yahoo Finance.

Enthusiasts don’t see the rally ending anytime soon.

This time next year, "we're going to have the same conversation, that bitcoin has had an incredible run," Bitwise chief investment officer Matt Hougan told Yahoo Finance. Bitwise expects bitcoin to cross $200,000 before the end of 2025.

One of the biggest Wall Street beneficiaries of this shift, BlackRock (BLK) CEO Larry Fink, was once a "proud skeptic" of bitcoin. The boss of the world’s largest money manager has evolved into one of its best-known advocates.

"I was a proud skeptic, and I studied it, learned about it, and I came away saying, 'OK, you know, my opinion [for] five years was wrong,'" Fink said earlier this year while discussing his previous views with CNBC.

His firm, BlackRock, now recommends intrigued investors put "as much as 2%" of their portfolio into bitcoin.

"We believe bitcoin is an asset class in itself; it is an alternative to other commodities like gold," Fink told analysts during an October earnings call.

Crypto Got Everything it Wanted in 2024_1

BlackRock and 10 other money managers such as Fidelity Investments and Franklin Templeton got the green light in January to launch spot bitcoin exchange-traded funds, allowing everyday investors to get exposure to the world’s largest cryptocurrency without having to own it.

BlackRock's ETF, IBIT, then became the fastest-growing ETF in history. The 11 ETFs that launched amassed $100 billion in assets under management as of Dec. 18, according to JPMorgan Research.

"You had folks who would have been allocating to bitcoin, but because there was no traditionally trusted, easy, efficient way to do it for their circumstances, they weren't in it," Robbie Mitchnick, BlackRock's head of digital assets, told Yahoo Finance. "And then the ETFs changed that."

BlackRock’s embrace of crypto (it also launched a smaller spot ether ETF in late July) coincided with an election year where pro-crypto congressional candidates received lots of industry support. Some of crypto's biggest players — including Coinbase Global (COIN), Ripple, and venture firm Andreessen Horowitz — spent some $135 million via super PACs.

Crypto Got Everything it Wanted in 2024_2

As a candidate, Trump also made a number of promises to the industry. He pledged to fire SEC Chair Gary Gensler, one of the industry’s greatest antagonists; appoint a crypto presidential advisory council; and establish a "strategic national bitcoin stockpile" with the help of Congress.

Whether the president-elect will make the US government a bitcoin holder or even buyer remains a hot debate.

But Gensler has already given his resignation notice and will be replaced by well-known crypto lawyer Paul Atkins if confirmed. For years, Atkins has made it clear he favors clearer regulations of cryptocurrencies that don’t stifle innovation or impose unnecessary oversight.

Trump has also appointed venture capitalist David Sacks to the role of AI and crypto czar. Through his venture firm, Sacks has already backed a number of crypto and AI firms.

Some other Trump Cabinet appointees have also in the past disclosed or discussed their exposure to crypto.

Crypto Got Everything it Wanted in 2024_3

If those executive branch appointees weren't enough, the industry is also eagerly awaiting what will easily be the most pro-crypto Congress in history.

"People are shocked by it because we're a new industry, and we're newly influential in Washington," Nic Carter, a partner and co-founder of crypto venture firm Castle Island Ventures, told Yahoo Finance.

The GOP is expected to push forward pro-crypto legislation that would offer clear regulation of stablecoins and the broader crypto market and even give big banks a better route to interact with digital assets.

Carter has met with Republicans to discuss the crypto world's lack of US banking access.

"We were an industry that's been picked on relentlessly for the last four years, and it's only natural that we would try and protect our interests," he added.

Crypto Got Everything it Wanted in 2024_4

But many regulated US banks still can’t touch crypto, Goldman Sachs CEO David Solomon noted at a recent Reuters conference.

"Everyone's speculating as to how that regulatory framework will evolve, but it's still unclear how the regulatory framework is going to evolve," Solomon added.

It’s still anyone's guess how long it could take for the first piece of crypto legislation to land before the House and Senate and then Trump.

"I would just caution people, if you think on Jan. 20 a switch is going to flip and everything's going to be better and roses for bitcoin and the digital asset community, it's just not how Washington works," Anthony Scaramucci, a crypto investor who worked in Trump’s first administration, told Yahoo Finance.

Crypto Got Everything it Wanted in 2024_5

These unknowns aren't giving much pause to some crypto evangelists though.

"Every day for the past four years I've said, buy bitcoin, don't sell the bitcoin. I'm going to be buying more bitcoin,” MicroStrategy chairman and staunch bitcoin bull Michael Saylor told Yahoo Finance this month.

“I'm going to be buying bitcoin at the top, forever."

Even some remaining skeptics on Wall Street admit it would have been smart to get in earlier.

“Of course, I wish I bought something that trades at 100 times the price it traded at a few years ago, right?” Citadel CEO Ken Griffin said at the NYT DealBook Summit earlier this month.

“We all have FOMO.”

Source: yahoo finance

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Economic

Stocks

Toyota Shares Gain for Second Day after Report on ROE Target_1

The stock gained 6% in Tokyo, capping an 11%, two-day gain. Shares advanced on Wednesday after the Nikkei newspaper reported the company plans to increase its ROE to 20%, citing an unidentified executive. A spokesperson said that Toyota “doesn’t have an explicit target or deadline” for ROE.

If the report is accurate, “the company would need to boost earnings from the value chain, in order to further propel profit margins upward,” Morgan Stanley MUFG Securities Co. analyst Shinji Kakiuchi wrote in a report. “We’ll also be watching for Toyota, as a part of moves to improve capital efficiency, to take funds from selling its equity holdings to bolster shareholder returns further.”

Toyota shares have jumped over 20% this year, outperforming the broader Topix index, as a weaker yen helped boost income in its home currency. Still, the latest announcement by the world’s biggest automaker showed global sales plateaued in November as lackluster demand coalesced with a pause in production at two plants.

Here are what other analysts and investors are saying on Toyota:

Toyota Shares Gain for Second Day after Report on ROE Target_2

SBI Securities Co. (Koji Endo)

Toyota first revealed its 20% ROE target in its interim financial results briefing

The target is ambitious; Toyota will need to take on drastic measures, and a large-scale shareholder return policy will be essential to achieve its goal such as increasing dividends or conducting buybacks

Shinkin Asset Management Co. (Naoki Fujiwara)

Talks of Toyota’s 20% ROE target leads to expectations of unwinding of cross-holdings, and shareholder returns

Investors likely focused on the speed of which all this may happen

Daiwa Securities Co. (Eiji Kinouchi)

Many investors have been underweight the stock, so there are expectations its positive performance will continue after the new year

Source: Bloomberg

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Justin

Economic

Forex

BEIJING (Dec 26): China revised upwards its 2023 gross domestic product (GDP) by 2.7% to 129.4 trillion yuan (US$17.73 trillion or RM79.3 trillion), a top statistics official said on Thursday, while releasing the fifth national economic census.

Policy support late this year has set China's economy on track to hit a growth target of "around 5%" as activity warmed slightly, but challenges such as potential US tariff hikes still weigh on prospects for next year.

Kang Yi, the head of the National Bureau of Statistics, made the remarks at a press conference in Beijing, the capital, adding that the bureau would publish further details of the revision on its website in the next few days.

China's economy has "withstood the test of multiple internal and external risks over the past five years, and maintained a generally stable trend while progressing," Kang said.

The fifth economic census carried out over the past five years encompassed the three years of the Covid-19 pandemic, which had a significant impact on the economy, he said.

The international environment had witnessed "profound and complex changes" since the previous such census, he added.

The revision of 2023 GDP would not have a significant impact on China's 2024 GDP growth rate, Lin Tao, the bureau's deputy head, told the same briefing, however.

On Thursday, the World Bank raised its forecast for China's economic growth in 2024 and 2025, but warned that subdued household and business confidence, along with headwinds in the property sector, would keep weighing it down next year.

The economic census showed changes in China's job market, with 25.6% more people employed in the tertiary industries at the end of 2023 than at the end of 2018, but secondary industries had 4.8% fewer employees.

As a severe property crisis hobbles a macroeconomic rebound, employees of property developers fell 27% to 2.71 million by the end of 2023 against the corresponding 2018 figure, the economic census data showed.

Overall employment in the property industry rose 40.2% to stand at 1.04 million by the end of 2023 over the figure at the end of 2018.

Tertiary industries range from retail to transport, catering, accommodation, finance and property, while secondary industries cover mining, manufacturing, utilities and construction, for example.

Source: Theedgemarkets

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Cohen

Economic

Commodity

Crude oil prices ticked higher today as traders turned optimistic following the latest news about Chinese government stimulus for consumer spending.

Brent crude was trading at $73.80 per barrel at the time of writing, and West Texas Intermediate was changing hands for $70.32 per barrel, both up from opening in Asia, after the Chinese finance ministry announced a new package of funds to go into higher pensions, medical insurance, and consumer goods trade-ins.

The stimulus move is the latest in a series aimed at supercharging the Chinese economy and, like all the stimulus reports before it, suggests higher oil demand, fueling the optimism of oil traders.

“Hopes for China's stimulus measures are supporting the market,” Rakuten Securities analyst Satoru Yoshida told Reuters. “Expectations that fossil fuel production and demand will expand after Donald Trump takes office as U.S. President next month are also bolstering oil prices,” Yoshida added.

“The obvious caveats apply with reading too much into price action at this time of year, but those that are still putting orders through the market are net buyers,” Pepperstone Group head of research Chris Weston told Bloomberg.

In addition to the China stimulus news, the latest weekly report on U.S. crude oil inventories also played a part in strengthening oil buyers’ appetite for the commodity. The American Petroleum Institute reported on Tuesday that inventories had shed 3.2 million barrels in the penultimate week of 2024. The estimate from the Energy Information Administration is due out later today. According to a Reuters poll, crude oil inventories could dip by 1.9 million barrels, accompanied by declines in fuels, of which 1.1 million barrels are in gasoline and 300,000 barrels are in middle distillates.

Looking at 2025, the same factors that drove oil prices this year will continue to drive them in the new year as well, with the notable addition of the Trump presidency, which is widely seen as bearish for prices due to his pro-oil and gas stance.

Source: OILPRICE

To stay updated on all economic events of today, please check out our Economic calendar

Risk Warnings and Disclaimers

Add to Favorites

Warren Takunda

Stocks

Asian shares were mostly higher Thursday in thin post-Christmas holiday trading, while oil prices rose.

Japan’s Nikkei 225 index surged 1.1% to 39,568.06, on strong gains in retailers and tourism-related stocks after Japan agreed to ease visa conditions for Chinese tourists.

Isetan Mitsukoshi Holdings, a major department store group, gained 7.7%. J. Front Retailing Co., owner of the Matsuzakaya and Daimaru department store groups, jumped 8.3%. Automakers also saw large gains.

China and Japan also agreed Wednesday to conduct talks on contentious security issues and other sources of friction during a visit by Japanese Foreign Minister Takeshi Iwaya to Beijing, where he met with Chinese Premier Li Qiang and Foreign Minister Wang Yi.

South Korea’s Kospi slipped 0.4% to 2,429.67, while the Taiex in Taiwan gained 0.1%.

The Shanghai Composite index edged 0.1% higher, to 3,398.08.

Thailand’s SET fell 0.1%.

Markets were closed Thursday in Hong Kong, Australia, New Zealand and Indonesia.

U.S. markets were closed on Wednesday and will reopen Thursday, when an update on U.S. unemployment benefits is due.

Gains in Big Tech stocks have contributed to a “Santa rally” for Wall Street. The S&P 500 gained 1.1%, while the Dow Jones Industrial Average rose 0.9%. The Nasdaq composite climbed 1.3%.

Also early Thursday, U.S. benchmark crude oil was up 8 cents at $70.18 per barrel. Brent crude, the international standard, picked up 4 cents to $73.21 per barrel.

The dollar rose to 157.41 Japanese yen from 157.19 yen. The euro fell to $1.0398 from $1.0410.

The year’s end historically has been a very cheerful season for the U.S. markets. The last five trading days of each year, plus the first two in the new year, have brought an average gain of 1.3% since 1950.

So far this month, the U.S. stock market has lost some of its gains since President-elect Donald Trump’s win on Election Day, which raised hopes for faster economic growth and more lax regulations that would boost corporate profits. Worries have risen that Trump’s preference for tariffs and other policies could lead to higher inflation, a bigger U.S. government debt and difficulties for global trade.

Even so, the U.S. market remains on pace to deliver strong returns for 2024. The benchmark S&P 500 is up 26.6% so far this year and remains within roughly 1% of the all-time high it set earlier this month — its latest of 57 record highs this year.

Source: AP

Risk Warnings and Disclaimers

Add to Favorites

Owen Li

Economic

Stocks

The MSCI Asia Pacific Index climbed for a fourth day, the longest winning streak since September, led by Japan and Taiwan,China. Japanese shares also rose after central bank governor Kazuo Ueda on Wednesday avoided giving any clues about a possible interest-rate hike. Most major markets in Europe will stay shut for the Christmas break Thursday, while trading will reopen in the US.

Equity bulls are pinning their hopes on what’s known as the “Santa Claus Rally” in which stocks rise during the final five trading sessions of a year and the first two of the new one. This time around that window started Tuesday.

“A follow-through from pre-Christmas momentum will mean a continued drift higher for Asian markets,” said Jun Rong Yeap, a market strategist at IG Asia Pte in Singapore. “Weakness in the yen on the back of recent Fed-BOJ policy divergence has offered some support for Japanese equities in today’s session, coupled with the year-end positive seasonality around the Santa Claus rally.”

Japanese retail shares gained after the country agreed with China to introduce more measures to promote tourist visits. The two nations also agreed that Beijing’s top diplomat should visit Japan in 2025, adding to signs the two nations are repairing ties that have been strained in recent years.

Department store operator J. Front Retailing Co., which also got a boost from better-than-expected earnings, jumped as much as 9% in Tokyo, while Isetan Mitsukoshi Holdings Ltd. and Takashimaya Co. also climbed.

Toyota Motor Corp. was the largest contributor to gains in the MSCI Asia Pacific Index, following a report the automaker is planning to double its target for return-on-equity.

Bank of Japan Governor Ueda on Wednesday avoided giving a clear signal he might raise rates next month by reiterating the need to keep monitoring risks for the economy in comments that nudged down the yen.

Shares of Chinese computing-equipment makers advanced after the nation said it planned to include the sector into the investment scope of local government special bonds. Kingsignal Technology Co. surged as much as 20% as did Broadex Technologies Co.

Treasury 10-year yields climbed two basis points to 4.61% before the US auctions $44 billion of seven-year notes on Thursday. The dollar was mixed against its Group-of-10 peers.

Since 1950, the S&P 500 (^GSPC) has generated average and median returns of 1.3% during the “Santa Claus” period, widely outpacing the market’s average seven-day gain of 0.3%, according to Adam Turnquist at LPL Financial.

US Futures in Tight Range after Asian Shares Gain: Markets Wrap_1

“When investors are on the ‘nice’ list, and Santa delivers a ‘positive’ Santa Claus Rally return, the S&P 500 has generated an average January and forward annual return of 1.4% and 10.4%, respectively,” he said.

The S&P 500 closed 1.1% higher on Tuesday, extending this year’s advance to 27%. The Nasdaq 100 added 1.4%, while the Dow Jones Industrial Average gained 0.9%.

“The action of the past few weeks shows that the big-cap tech names are still the key leadership group,” said Matt Maley at Miller Tabak. “These big-tech names are highly overweighted in the portfolios of a huge number of institutional investors. Any buying they do over the next week is likely to be concentrated in these names.”

In commodities, oil held gains after an advance on Tuesday, with China’s stimulus measures and the outlook for US stockpiles in focus.