As 2024 winds down, we’re revisiting the predictions we made in the CRE Expert Predictions of 2024 Report at the start of the year. Our five predictions for 2024 were based on data, research and interviews with 12 carefully selected subject matter experts across commercial real estate. Now, with the benefit of hindsight, we’re evaluating how those forecasts held up—not just to reflect, but to offer valuable lessons and context as we look ahead to 2025.
Prediction #1: Interest rates will start to drop by the second quarter.
After Fed Chairman Powell’s encouraging comments last December that the Fed was ready to start lowering rates, the general consensus was that we would see the first cut in the second quarter and that the year would bring 5 to 6 rate reductions by year-end. Instead, rates remained unchanged while the Fed kept a close eye on inflation data and the labor market. It wasn’t until September that the first rate cut arrived, and two more followed in November and December, bringing the year’s total to a decline of 100 basis points.
Prediction #2: The bid-ask spread, which impeded deal flow in 2023, will narrow as prices recalibrate.
This prediction proved accurate. The wide bid-ask gap began to narrow even before the first interest rate cut, as the 10-year Treasury yield dipped below 4% multiple times throughout the year, fueling market optimism and signaling that the time to deploy capital had arrived. As the year progressed, sellers listed more properties for sale and buyers moved off the sidelines to explore new opportunities. As anticipated, we also saw property valuations decline in certain asset classes. In the office sector, property values dropped more than 50% in many metros and deals closed at discounts as high as 75% compared to prior sales. As predicted, we also saw property valuations decline—ranging from the teens to, in some cases, as high as 40-50%.
Prediction #3: CRE lending and dealmaking will rebound by midyear.
This prediction was contingent on the Fed lowering interest rates by midyear, so it’s no surprise that this one missed the mark after the Fed delayed the first cut until the end of the third quarter. This left CRE lending and transactions volume muted in the first half of the year. Q2 CRE lending was up by only 3% year over year, but momentum grew in anticipation of the first rate cut and rose a dramatic 59% year over year in the third quarter. As capital moved into play and sellers put more assets on the selling block, dealmaking volume strengthened. LightBox tracked 53 sales above $100 million by October, a sharp uptick from 29 in September and 24 in August.
Prediction #4: Treasury rates, tied to borrowing costs and cap rates, will stabilize at 3.5% to 4% by midyear.
This one didn’t quite pan out. The yield on the 10-year Treasury fell below 4% several times during 2024, triggering a burst of market optimism, only to rise again. The Treasury yield bottomed out around 3.60% in mid-September only to spike to nearly 4.5% in October and November amid growing concerns about inflation and future rate cuts. As year-end closes in, the 10-year Treasury yield sits at 4.32%, a reflection of investor caution and well above the midyear forecast. Since the Fed’s September rate cut, yields on long-dated Treasuries have been climbing. For instance, after bottoming at 3.62% shortly after that cut, the yield on the 10-year Treasury rose steadily, peaking at nearly 4.5% in mid-November. Factors driving this upward trend included growing concerns over U.S. debt levels, stronger-than-expected economic data, and fears of reignited inflation. As of December 13, 2024, the 10-year Treasury yield sits at approximately 4.32%, reflecting investor unease and recalibrated inflation expectations.
Prediction #5: Secondary market loan sales will increase as distress ramps up.
This prediction has played out as as anticipated, if not a bit slower than expected. Banks have largely been responding to loan maturities by extending loans in the hopes of lower rates down the road. This strategy creates a “Snowplow Effect” as the volume of loan maturities grows with each passing year. These loans will face a day of reckoning and eventually need to be addressed. This year, the volume of nonperforming loans brought to market crept up slowly, which also stalled price discovery.
LightBox will continue to monitor market conditions and share insights from leading industry experts at this time of choppy recovery. Stay tuned for our predictions for 2025, which we will release early next month and will give a sneak peek of them on the CRE Weekly Digest podcast dropping next week.
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