THIS REPORT IS PREPARED BY Writer: Teresa Marziano, Real Estate Salesperson
Executive Summary
QUARTER 2025
Consumer and investor sentiment has reached a low level as the Country faces an upheaval in trade, tariffs and policy direction. Corporate leadership teams are preparing to protect profits and, in doing so, new projects and headcount may suffer. Uncertainty has certainly escalated for businesses and consumers. However, for Commercial Real Estate (CRE) investors, uncertainty is not a new companion. Heightened uncertainty has been part of the CRE’s investment landscape for more than two years. Most recently, some semblance of interest rate stability has encouraged investors to start searching again for opportunities in this asset class. CRE has faced fierce headwinds, and it will continue forward, delivering for wise investors, despite the surrounding noise.
CRE investors have adapted to a challenging environment with higher rates by updating their strategic plans and property underwriting approaches before acquiring, and by increasing operating efficiencies for assets in their portfolio. Investors are valuing assets and developments to reflect a market where interest rates remain structurally higher than over the two decades and consumer behavior has experienced significant changes. Investors are also underwriting higher inflation that, for now, remains ingrained in our economy, impacting refurbishment projects and tenant improvement incentives. Evolving consumption patterns, e-commerce and undefined office employment trends are imposing a layer of underwriting complexity that CRE investors have had to accept and embrace. In general, occupancy trends have continued to improve due to economic resilience and a return to the office under hybrid approaches. The next few weeks will present a critical test to the US and Global economies as different countries respond and try to operate under a new US tariff regime. This change will test the resilient economic activity and inflation moderation trends that we have enjoyed.
Among the new challenges that CRE will have to face in 2025 is a potential ownership change for The Federal Housing Finance Agencies (Fannie and Freddie). These agencies have historically been critical financing providers to the multifamily segment. By purchasing and guaranteeing multifamily (and single family) mortgages, these agencies help free up capital for lenders, thereby enabling more borrowing and investment in the multifamily (and other) real estate market segments. In recent days, there have been discussions about restructuring the Agencies and fully privatizing them. This would mean removing government backed guarantees for the mortgages they originate and/or for the institutions themselves. Any change in their mandate, guarantees or ownership structure could disrupt, even if only temporarily, the flow of mortgage originations, potentially slowing multifamily and other real estate transaction markets.
CMBS delinquency rates appear to be stabilizing. We observed consistent month-over-month increases throughout 2024. Office properties were the driver of an acceleration in delinquencies in the second half of the year. The initial months of 2025 have brought signs of easing delinquencies, however, in March, there was an increase of 35 basis points to 6.65%, and the overall CMBS delinquent balance increased from $36.0 billion in February to $39.3 billion in March.
Aware of high delinquency rates on some of the commercial mortgages that originated immediately after the Pandemic, CMBS sponsors are changing underwriting standards. According to a CRED iQ analysis of key metrics for new CMBS conduit lending in Q4 2024 compared to Q3 2024, office and residential’s underwriting experienced the greater expected capitalization increase. Office cap rates had an average capitalization (cap) rate of 7.40%, up from 7.16% in Q3 2024. Multifamily cap rates averaged 5.90%, a slight increase from Q3’s average of 5.77%.
From the perspective of banks lending to CRE, Trepp reported origination volumes increasing throughout last year (2024) but are still below pre-pandemic levels. In Q4 2024, bank CRE loan delinquencies declined for the first time since 2022. The overall delinquency rate in loans residing in bank balance sheets ended the year 2024 at 1.99%, a slight decline from 2.04% in Q3. This is the last reported bank data and bears directional consistency with the CMBS market.
Executive Summary
experiencing strong demand. Underscoring an overall progress in fundamentals, retail rents increased from Q4, 2024 and from twelve months ago.
Westchester Industrial and Flex- Stability during the First Quarter
Industrial space demand was healthy during the first quarter of 2025. Supply and demand of space were in balance. Few departures helped occupancy and fewer deals were completed. Pricing remained stable with no increases recorded from the last quarter of 2025. It is possible that trade disruptions impact new lease signings. However, this segment of the market is enjoying strong demand, very limited new supply and low vacancy. It is unlikely that Southern Westchester will experience major tenant departures even with the backdrop of a trade war.
Westchester Transactions remain subdued
CRE transaction volumes are still subdued. The first quarter was weaker than the fourth quarter of 2024, which is not surprising as transaction volumes typically improve in the fourth quarter. Median prices declined modestly. Anecdotally, larger banks have begun to lend again to CRE. Smaller banks are open to lending to their best customers and those who are willing to keep deposits with the institutions. Price discovery continues. Assets priced below replacement value immediately attract investor attention but those that require negative leverage are slow to move as investors know that rental growth alone will not be able to provide the targeted return.
Looking forward to 2025, we need the interest rate environment to stabilize, and new economic policies to be announced and absorbed by the market, before we see a meaningful increase in investment transaction volume.
About this Commercial Real Estate Report
This report was researched and written by Teresa Marziano. Please contact Teresa (914- 441-2254) or (TMarziano@ HoulihanLawrence.com) for questions, comments or feedback about the contents of this report.
HOULIHAN LAWRENCE COMMERCIAL TEAM
Commercial real estate is facing a challenging period as low-interest rate loans olcome due. Interesting commercial real estate investment opportunities will likely become available. Investors must be prepared to evaluate and make decisions expediently as opportunities emerge. Given the consumer and market changes brought about by the intense period of change we have experienced due to structurally higher inflation, higher financing costs, and most recently, policy changes, it is very important to correctly assess market and economic risks that add to the complexities of acquiring commercial real estate. Understanding the ever-changing market forces that are shaping the fundamentals for each property requires a deep knowledge of the property, local and regional insights, and close contacts with the right financial partners. Our Team is highly skilled in all these areas.
Reach out to HOULIHAN LAWRENCE COMMERCIAL for a complementary assessment of your real estate, an evaluation of a purchase target, and to receive an in-depth perspective on the ever-changing Westchester commercial real estate market.
Multifamily Projects: Asking Rent Rebounds as Robust
Economic Activity Persists and Deliveries Fall
WESTCHESTER, SOUTH OF I- 2 ��
Multifamily rent growth resumes as pricing power returns to Landlords in a market with less competitions from new deliveries.
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2025
Westchester Office and Retail – Office Stabilizes and Retail
Rents Improve
WESTCHESTER, SOUTH OF I- 2 ��
Office occupancy is finally experiencing a recovery, albeit at a slow pace. Leasing was not strong during the first quarter, but less departure led to a reduction in vacancies.
Retail rental prices gained ground, but vacancies increased modestly as many big box tenants rationalized their real estate or closed.
RENTS IMPROVE IN A STABLE OCCUPANCY ENVIRONMENT
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2025
Investment Activity Begins to Rebound Price Discovery Starts
SOUTH OF I- 2 ��
Investment sales volume declined from Q4 but remains above the lows of Q2 and Q3 of last year. Median pricing declined suggesting “vale” deal and properties needing investment dominated transactions.
TRANSACTIONS RECEIVE A LIFT AS PRICING BECOMES MORE ATTRACTIVE
Sources: COSTAR, Trepp, US Bureau of Labor Statistics, Data Reflects Fundamentals for Westchester County Area South of I-287. Price Index for Westchester retrieved from FRED, Federal Reserve Bank of St. Louis; April 2025