After several years marked by high inflation, subdued growth and economic uncertainty, the U.S. housing market appears to be on track for a recovery in 2025. Signs indicate that the industry could be in a more favorable position compared to recent years, thanks to an economy that has generally managed to avoid a deep recession, shaping up for a "soft landing" in line with the Federal Reserve's (Fed) dual mandate.

This scenario could positively boost both rental prices and occupancy levels, which bodes well for the commercial real estate market this year.

The Interest Rate Challenge: An Uncertain Environment

At its January 2025 meeting, the Federal Open Market Committee (FOMC) decided to keep the benchmark rate in a range of 4.25% to 4.50%, marking the first pause since it began cutting rates in September 2024, following a cycle of increases in 2022 and 2023.

Although market expectations point to a downward trend in rates, the speed with which these adjustments will occur remains uncertain. Factors such as more persistent inflation, a robust labor market and political uncertainty could slow the pace of future rate cuts.

It is key to understand how interest rates affect different time horizons differently and their respective impact on the real estate market:

• Short-term rates. They are directly influenced by the Federal Reserve and affect financial instruments such as SOFR.
• Medium and long-term rates. They depend on the market's expectation of inflation and the future economic trajectory. Although influenced by monetary policy, they tend to be more volatile and difficult to predict.

Impact by asset class

• Multifamily. Demand for affordable multifamily properties remains high, although Class A properties face cyclical downward pressures. In states such as Texas and Missouri, there is an oversupply of such properties, which is putting downward pressure on rental prices.

• Industrial. This segment continues to show solid resilience, driven by growth in e-commerce and logistics. According to Moody's CRE, in the third quarter of 2024, the asset class vacancy rate was 6.8%, placing it below pre-pandemic averages.
• Retail. Performance has been mixed, depending on location and concept. Supermarket-anchored shopping centers and luxury stores continue to show good results, despite the growth of e-commerce.
• Offices. Signs of normalization are beginning to show as more employees return to face-to-face work. The office vacancy rate fell to 20% after three consecutive quarters of record levels, although with significant differences between cities. For example, New York recorded a vacancy rate of 13.3%, while San Francisco reached 22.1%, according to Moody's CRE.

Despite the uncertainty,sentimentamong business leaders is improving and the likelihood of a recession appears low, provided there are no unexpected geopolitical events or supply shocks. If the "soft landing" scenario materializes, rates could experience declines at a moderate pace, cementing a more favorable environment for real estate in 2025.

Marco Aurelio Arellano

Real Estate Financial Fund Analyst Fynsa AGF