Turn in, apex and exit
Since 2020, real estate markets have seen some interesting times, as supply chain disruptions, cost inflation and higher rates all combined to weigh down asset prices. In 2024, the downturn has run its course, as we look forward to the next upswing.
Eyeing the corner
Heading into 2025, there are more definitive signs of a turning point in local commercial real estate markets, marked by stronger share prices, firmer investor sentiment and a cautious uplift in transactions, even ahead of actual reductions in policy interest rates.
Foot on the accelerator
Already, we are seeing gains in commercial asset values for the first time this cycle. While these initial price gains are modest, they do signal a clear change in sentiment as investors move from fear to greed, from loss aversion to a search for profits.
A model’s outlook
We can use simple econometric models to illustrate the potential impacts of firmer market conditions, to better understand the timeframes for a turnaround and the likely extent of the subsequent rebound in prices or recompression in cap rates.
Compression and ignition
With an improving real estate market, we anticipate a broadening recovery to come through as firmer cap rates in 2025. The initial pace of cap rate recompression is likely to be quite modest, as it will take some time for markets to gather momentum.
Strategies for the next lap
As investors look for a timely window for a return to market, it is important to reinforce the perennial importance of sector selection in 2025. The outlook remains strong for living sectors, as out-of-favour sectors make a slower comeback.
