CoStar’s Deep Dive Reveals CRE Upswing Signals Amid Market Complexities Article originally posted on Globe St. on February 3, 2025 Many in CRE have been predicting market recoveries are just around the corner since at least 2022. According to analysis out of CoStar Group, there are signs that things may be improving on a fundamental level. However, it will take time and there is the possibility that economic developments in 2025 could knock things awry. “There’s something about rolling the calendar over that makes people feel optimistic and positive,” Chad Littell, CoStar national director of U.S. capital markets, told GlobeSt.com. “I approach markets differently where I’m looking for a specific environment or constellation of signs to align and tell us the probability of things lining up on not.” However, 2025 may be different because of certain patterns in transactions, cap rates, and vacancy rates. Typically, real estate cycles run six to eight years and data suggests that the market could be in the early stages of a new cycle. “When we look at a value-weighted number, basically bigger properties in larger markets, the last quarterly trend that was positive was the second quarter of 2022,” Littell said. “By the second quarter of 2023, we were already negative 15% year over year, then in 2024 we were 29% year over year. For value add office, it’s about 45% from the all-time high. There are some properties down 15%, there are some down 80% or 90%.” However, the rate of change in falling values — the second derivative in calculus — has been slowing, a process that must happen before values can start rising again. “When we get back to thinking about this year over year, the second quarter last year was when that second derivative trough started to happen,” Littell says. “We can be in a position that in late 25 we could be back to neutral price change and maybe positive price change, and that’s for office.” Other types might do better. What the Great Financial Crisis of 2008 helped show is a pattern of changes in transaction volume, pricing, cap rates, and vacancy. First, cap rates peak while rent growth hits a trough. A couple of quarters later, vacancy peaks because even with low levels of demand, developers have stopped building in volume, effectively meaning a halt in new supply. “Even at a low level, I can run that out over the next several quarters and see once the construction spigot goes to zero, any demand from there, vacancy will start to come down,” Littell says. “No new supply plus positive absorption means vacancy goes down.” That’s when investors can look to buy, so long as capital has the conviction that the worst is over. “That is the third point we need to see,” he said. “When those are all hit, we should also be saying cap rates should have peaked or are peaking. When you see that vacancy number peak, that is that confirmatory thing saying that we’ve got peak cap rates.” Not that it’s a guarantee of safety. “Risk is not out of the system, for sure,” Littell adds. Inflation may start to rise, depending on actions of the Trump administration. There are also bull and bear cases for the 10-year Treasury yield, either of which would affect CRE borrowing and broader economic conditions. So, looking for a drop in vacancies in a given asset type is only one step. A second is to evaluate developing trends to see if what might seem the right move would be crossing traffic that includes an oncoming truck.