National effective asking rent growth could hit approximately 2.3% this year, with the largest share of the top 50 markets seeing rises between 2% and 2.9%, according to an apartment market analysis from RealPage.

Additionally, prices will rise more than 3% in about one-third of the top 50 markets, while 16% will see more moderate gains of between 1.5% and 1.9%, and 6% will have minimal growth of around 0.5%. The remaining 6% of markets – which are Austin, Denver and Phoenix – are projected to experience drops in the category this year, although they will be less severe than last year.

Meanwhile, Richmond is expected to lead the nation with the highest rent growth in 2025. The forecast for Washington, D.C., has been downgraded despite a solid Q1 performance due to ongoing federal job cuts that are expected to weigh on the local economy and beyond, said RealPage.

During the first quarter, multifamily demand remained strong, absorbing 138,000 apartment units, which represents a record high for the first three months of the year. Atlanta led all major markets during the quarter with absorption of 7,612 units, followed by Phoenix with 7,461 units absorbed and Dallas with 7,387. Anaheim was the only major market to record net move-outs during the quarter. The apartment market is expected to absorb nearly 460,000 units this year, the report predicts.

Roughly 116,000 units came online during the first quarter, reinforcing that new deliveries have passed their peak. RealPage expects 431,000 new deliveries for 2025, a decrease of 26% from 2024’s total deliveries.

Rent growth gained momentum in early 2025, buoyed by 0.3% growth during the first quarter specifically. Notably, this marked the first quarterly rent growth during the first quarter period since 2022, said RealPage. Among the top 50 markets, 26 outperformed the national average annual rent increase.

RealPage noted that job growth got off to a slower start this year after a strong finish to 2024. The 456,000 jobs added during the first quarter were well below the first-quarter average of 673,000 jobs.

With the uncertainty and economic volatility currently in place, it’s difficult to determine short-term outlooks for commercial real estate. Because of this, Marcus & Millichap’s Senior Vice President, John Chang, opted to focus on the longer-term issues. In a recently released video, “The Forces Driving Long-Term Rental Housing Demand,” Chang focused on one demographic: millennials.

This age cohort is 73 million strong and ranges in age from late 20s to early 40s, putting “the bulk of this generation in the midst of a variety of significant life milestones,” Chang said. The average marriage age is 29 years, meaning this demographic is in the midst of family formation, which is having an impact on the housing market.

Here’s the surprise. “The enormous wave of millennials in their prime household formation years is a core underlying housing demand driver,” Chang said. “Even though the leading edge of this cohort is aging into their 40s, they’re staying in rental housing longer.”

Better Apartments

Chang explained that apartment lease renewal rates have been increasing over the past year and are currently at 55%.

One reason for this is improved living. “The quality of life in apartment rentals has improved tremendously over the years, with more services and amenities, higher-caliber finish levels and better floor plans,” Chang said. Apartment developers have improved their offerings to boost tenant appeal, which has led many young adults to stay put and push home ownership down the road, he added.

Affordability Gap

Then there’s the fact that it’s expensive to buy and maintain a home these days.

“The quality of housing they can rent compared to the quality of housing they can afford to buy has grown wider than it was in the past over the last few years,” Chang remarked.

It’s no secret that the median price of a single-family home has increased, leading to a decrease in homeownership affordability. Given the almost $1,300 gap between owning a home and renting an apartment, “a lot of young adults are choosing to delay their first home purchase,” Chang said.

Specifically:

• In 2010, the median age for buying a home was 30 years

• In 2020, the median age for buying a home was 33 years

• In 2022, the median age for buying a home was 36 years

• In 2024, the median age for buying a home was 38 years

What’s the Outlook?

Looking ahead, Chang said he doesn’t see a dramatic change in the fundamentals over the next few years. Homebuilders aren’t adding enough inventory to reduce prices, and mortgage rates aren’t declining, either.

Looking forward five years, “it looks like the U.S. will continue to face a housing shortage, and there will continue to be a significant affordability gap between homeownership and renting,” Chang said.

Meanwhile, as apartment offerings continue to improve, demand for this type of housing will increase. Furthermore, with the slowdown in construction, Chang said multifamily vacancies will likely trend lower as rent growth strengthens.

The Palisades and Eaton wildfires raging across Los Angeles are among the most devastating and destructive on record. More than 40,000 acres and 12,300 structures have been destroyed by the event, with as many as 200,000 residents under evacuation orders and warnings, according to the U.S. Geological Survey’s recent statistics.

While residential real estate has taken a beating throughout the region, a special report by Marcus & Millichap examined the impacts of fires on commercial real estate. Perhaps unsurprisingly, local hotel demand has increased, with occupancy up by as much as 1,200 basis points (bps) in areas affected by the blaze. “The increase in bookings may raise the county’s monthly occupancy rate above the low 60% threshold, where it held during January 2024 and 2023,” the report’s authors said.

The report lists other possible CRE impacts:

Increased demand for apartments. Unfortunately, multiple homeowners and renters have been displaced, which could lead to an increased demand for apartments. Apartment vacancy rates in impacted submarkets already ranged from 4.9% to 5.6% before the fire. This could mean that “some displaced households may have to look outside their communities for rentals,” the report said.

Greater need for community retail. The report said that retailers in affected submarkets whose stores were undamaged could see an influx of customers, especially those “in and proximate to Pacific Palisades and Malibu.” The same could be said of retailers in Altadena, CA, along and near Lake Avenue, where multiple storefronts were destroyed.

Challenges for construction. Due to site-clearing and massive rebuilding efforts, construction resources could be diverted from elsewhere. The report indicated a challenge to local labor availability. Building materials costs will also increase. Furthermore, “the anticipated influx of project proposals could also translate into a backlog of building permits awaiting approval, impacting prospective developments elsewhere in the metro,” the report said.

Insurance problems. New insurance policies might become less available. And those that are available could cost much more. The report noted that increasing premiums and fewer providers could impact investment strategies and homebuying activity. “This dynamic could increase the local rate of net out-migration already apparent,” the report added.

Commercial real estate investors have much to look forward to in 2025, both from an operational standpoint and an investment transaction point of view, said John Chang, national director of research and advisory services at Marcus & Millichap.

Describing 2024 as a choppy year for CRE, Chang noted that consumer sentiment and small business optimism began to tick up in November and December.

“Those psychological dimensions can play a big role in people's decision-making, and can really influence commercial real estate,” said Chang.

Positive consumer sentiment tends to drive household formation and is a key indicator for apartment absorption trends, while small business optimism is a good indicator of both hiring trends and CRE transaction activity. Consumer sentiment bounced by 5% in the final two months of the year to its highest December reading since 2020 and the Small Business Optimism Index jumped 8% in November, also achieving its highest rating for that month since 2020, Chang said. Those strong gains suggest that 2025 will start out on a positive footing.

A post-election bump could be playing into these trends, although uncertainty around policies like tariffs and immigration as well as the direction of inflation remain.

“I suspect the first half of 2025 could deliver a bump in hiring, together with increased demand for apartment housing, office space and industrial space,” said Chang. “Retail space demand is already strong, but absorption will be limited by space availability.”

If strengthened sentiment translates to positive space demand across the various property types, commercial real estate investor activity could be boosted, he said. Elevated interest rates will likely continue to create headwinds for the market, but improving property fundamentals could bridge the spread between buyer and seller expectations.

The total number of CRE transactions last year was on par with 2015 at roughly 63,000 deals over $1 million dollars for the four main property types. Chang said he expects transaction velocity for 2025 to top that level, especially if confidence levels continue to trend upward.

“Elevated interest rates will continue to pose a challenge for investors, but if absorption demonstrates enough momentum to drive vacancy rates lower and spark increased rent growth, investors could begin to integrate stronger forecasts into their underwriting that would go a long way toward narrowing the bid-ask spread,” said Chang. “And if investors also bake in the positive longer term demographic trends and slowing pace of construction, they may see increased opportunity.”

There's a tremendous amount of uncertainty going into the new year, which makes it difficult to predict how the CRE climate will evolve, said John Chang, national director of research and advisory services for Marcus & Millichap.

National policy, tariffs, immigration policy, budget proposals and tax laws all could impact economic growth, international trade, job creation, inflation and interest rates in the near term. However, looking out over the next five years, three CRE trends are apparent, he said.

The first is demographics. The United States has one of the most favorable demographic outlooks of any country, said Chang. Seventy-five million baby boomers aging into retirement are followed by 73 million millennials and 70 million Gen Z.

“Each of these age cohorts continue to drive demand for different types of commercial real estate,” said Chang. “Baby boomers are bolstering the need for medical office space and seniors housing, while millennials and Gen Z will continue to drive demand for both owner-occupied and rental housing, and all age groups will support the demand for retail and industrial space. So the long-term space demand drivers for virtually every type of commercial real estate are on a positive track and will be supported by positive demographics.”

The second trend is an anticipated slowdown of construction. The elevated cost of construction will inhibit substantial supply additions over the next few years or longer, said Chang. The construction slowdown is being driven by the high cost of debt and capital, rising materials, labor and land costs, and fees and expenses associated with zoning, permitting and entitlement.

“While the demand drivers for commercial real estate should remain robust over the next five years, the new supply will likely fall behind,” said Chang. “That implies tightening vacancy rates and rising rents that bolster the financial performance of real estate assets.”

The third trend is increased capital flowing into the sector. There have been twice as many transactions in 2021 as there were in 2007, when dollar volume reached record highs that many thought would never be eclipsed. On an inflation-adjusted basis, the combination of increased commercial real estate data availability, professional management, lending, liquidity and sophistication and the emergence of broad-based syndication have all combined to make commercial real estate a more mainstream investment option, a trend that is likely to continue, said Chang.

In addition, as an estimated $84 trillion in wealth begins to transfer from aging baby boomers and the silent generation to younger generations, including money and real estate, additional capital is likely to flow into CRE investment, he said.

“While I may not have detailed insights into how the policies of the newly elected administration will impact the commercial real estate market in 2025, I can say that the underlying drivers supporting commercial real estate performance and the flow of capital into the sector over the next five years should be quite strong,” said Chang.

A solid labor market could lift the commercial real estate market as 2024 comes to an end. Hiring reached a six-month high in November as job creation rebounded from disruptions related to weather and labor relations in October, according to a report from Institutional Property Advisors.

The economy added 227,000 new jobs in November, on its way to an expected year-end total of more than two million new employment opportunities, the report said. Although this figure beat expectations, the unemployment rate ticked up 10 basis points to 4.2%.

During the second half, an average of 131,500 positions per month were added, which is below the average of 191,000 from the first nine months of the year and from what was typical in the pre-pandemic period.

In the office sector, stronger absorption indicates hiring activity in November and traditional office-using sectors had favorable employment figures. The professional and business services sector added 26,000 jobs, erasing a decline of 23,000 positions in October. Headcount in the information segment held flat, an improvement from a decrease the prior month, and financial activities firms saw their best month of hiring since July 2023, according to the report.

“These trends bode well for the office sector after the third quarter reported the strongest 90-day period for the property type’s net absorption since the end of 2021,” the report said.”This boost helped the national office vacancy rate hold steady year over year for only the second time in the post-pandemic era.”

The multifamily sector also is set for improved performance in 2025. The education, health services and public sectors added a combined 112,000 jobs last month, which supports consumer activity and demand for housing. This is reflected in apartment absorption reaching its third-highest level on record. While renter demand is somewhat slower for the year, fewer deliveries are expected, which should help improve both vacancy rates and rent growth, said the report.

The November employment report increased the chances that the Fed will act to cut interest rates further this month, the report said. The Fed meets again on December 18. Meanwhile, the prospect of tariffs on imports from Mexico and Canada could raise short-term inflation pressure.

“Yet, bond yields in recent weeks have trended lower,” Institutional Property Advisors wrote. “The 10-Year Treasury yield has dipped about 30 basis points from its post-election peak to around 4.1 percent. As a common lending benchmark, if this trend continues, it could help some commercial property transactions pencil.”

MMCC, and its institutional division IPA Capital Markets, have not only continued to add experienced originators to their highly-collaborative teams, but have also innovated new solutions for clients, providing capital solutions in a challenging market. TRD sat down with some of the newest recruits to learn how the firm’s unique strengths have helped them provide clients with capital markets services and commercial real estate financing solutions and other investment opportunities, and what recent rate cuts mean for their continued success.

Navigating A Tough Market

Notwithstanding the Federal Reserve’s recent move to reduce the federal funds rate by 50 basis points, we’re still living in a tight market when it comes to sourcing capital. Max Herzog, Executive Managing Director at IPA Capital Markets, describes how market uncertainty has led to more expensive capital stacks and fewer overall transactions.

“A lot of equity groups have transitioned to sub-debt mezzanine, B-note pieces and preferred equity loans as opposed to straight equity,” he explains. “They can obtain similar returns to what they’ve traditionally received on the equity side in a less risky part of the capital stack. Despite recent rate cuts and the anticipation for more in the future, there is still uncertainty in the market.”

Some originators, including Frank Montalto, Managing Director at IPA Capital Markets, are beginning to see the market shift.

“Activity and volume over the past 60 days have picked up tremendously,” says Montalto. “I believe there’s a notion of freeing up a little bit of capital in this space, along with recent rate cuts, which is going to make it a lot easier to pencil deals.” 

MMCC helps clients navigate the challenging post-pandemic market, providing tailored capital solutions for CRE financing as well as offering a broad range of other opportunities for investors. Thanks to their longstanding capital relationships, the originators are able to work with lenders to find creative solutions in the face of these headwinds. In the last twelve months, the firm’s capital markets teams have closed over a thousand transactions with 340 unique capital sources, producing $6.8 billion in funding for assets located in 44 states and Canada. 

On the loan sales and trading side, MMCC’s subsidiary Mission Capital Advisors (MCA) works with lenders in their disposition of whole loans and REO, providing investors with a variety of opportunities to expand their portfolios during a time of generalized uncertainty. A leader in the loan sales and trading space for two decades, MCA has closed over $79.4 billion in loan and REO sales and $189 billion in mortgage services transactions since its inception in 2002.

“The executives at MCA have fluency and experience in trading complex portfolios,” says Evan Denner, Executive Vice President and Head of Business at MMCC. “Especially in this market cycle, as lenders try to fortress their balance sheets, it’s more critical than ever to have a team with deep market knowledge. Behind the MCA team are more than 1,700 sales agents in over 80 offices across the U.S. and Canada that have in-depth market knowledge and relationships. Having these boots on the ground has been invaluable providing the team with real time local market data derived from tens of thousands of sales transactions.”

A Growing Team Closes Marquee Deals

In spite of uncertainty and more expensive capital, MMCC and IPA Capital Markets have continued to grow the team of originators and close major deals. Recent additions to the team, including Herzog and his partner, Senior Managing Director, Marko Kazanjian, both came from JLL and have been instrumental in expanding the institutional capital markets business in New York since joining IPA Capital Markets in August of last year and recruiting four additional members to support the NY team.

“In addition to the tri-state NY market, we’ve closed deals in South Carolina, Miami, and Chicago,” notes Kazanjian. 

Other recent hires across the platform include Brandon Roth from JLL, returning IPA Capital Markets originator Anita Paryani-Rice from Newmark and Harry Krieger from CBRE on the IPA Capital Markets side, as well as Jennifer Salas, Francisco Nacorda, Robert Cronenberg, Robert Caliguri, Richard Williamson, Casey Hansen and Mark Litwack on the MMCC side, and James Gosse on the MCA side.

“Over the past three years, we have had the privilege of welcoming numerous seasoned originators, significantly enhancing our already robust talent pool,” says Erika Banach, First Vice President, Corporate Strategy & Development at MMCC. “Our leadership is committed to offering exceptional support, with the primary objective of fostering business growth and equipping our teams with the necessary resources and tools to provide an unparalleled level of service to our clients.”

This strategy has paid major dividends, with recent hires closing a slew of notable deals this year.

For example, Herzog and Kazanjian’s team recently secured $37.25 million in financing for a major South Carolina multifamily development with Protective Life Insurance Company on behalf of NYC-based developer JEM Holdings. Dubbed The Parker, this amenity-rich 14-building project will span 30 acres in Aiken, SC, while the terms of the seven-year loan include a competitive fixed interest rate and loan-to-cost of 60%. 

The team also secured $85 million in financing for a Class A industrial asset just outside JFK Airport in Queens, NY. The industrial condominium spans the first two floors of Terminal Logistics Center, a newly built five-floor facility designed for both industrial and self-storage purposes, and the tenants include a global airline catering services firm.

The Twin Pillars of Technology and Teamwork

In addition to filling out its team of originators with the best and brightest from around the industry, MMCC provides cutting-edge proprietary tech that puts them at the front of the pack. This robust platform keeps originators connected with one another, giving originators unique insights throughout every phase of a deal.

“We have internal systems that allow us to see terms lenders are offering in each of the few thousand transactions we typically close annually,” explains Montalto. “We have multiples of this from the thousands of quotes we get annually. These data points and knowledge allow us to create a market on behalf of our clients, and ultimately provide them with superior capital solutions.”

By constantly sharing this proprietary information throughout the company, each originator can leverage MMCC’s massive resources to provide each client a superior capital solution based on their unique needs. “When a client hires me, they’re hiring all of IPA Capital Markets,” says Montalto.

Of course, this spirit of camaraderie doesn’t stop at the limits of the CRM. It’s a collaborative environment that has allowed MMCC to grow even in a challenging environment. 

“If you need help, people raise their hands without any expectations,” says Anita Paryani-Rice, Senior Managing Director at IPA Capital Markets. “Internal connections are so important because they help us to help our clients.”

As interest rates creep down and capital markets begin to loosen up, the team at MMCC is in a commanding position heading into Q4 and 2025.

“It’s been a great first year for us here,” says Herzog. “We’re looking forward to continuing to grow our team and provide the best service we can to our clients.”

Visit MarcusMillichap.com/Financing to Expand What’s Possible for financing your next CRE transaction.

After cutting interest rates by 50 basis points, the Fed has answered a major question, but more concerns about the economy and the impact on commercial real estate have arisen.

Many investors are asking why the 10-year Treasury went up after the Fed cut the overnight rate, said Marcus & Millichap national director of research and advisory services John Chang.

"Although the many different US Treasury rates tend to move in the same direction, like an unruly herd, they don't move in lockstep," said Chang. "The timing and magnitude of interest rate movements of various maturity terms can vary, and they can even go in opposite directions over the short term."

In addition, the rate cut was already baked into bond pricing and some investors viewed the large cut as a sign the Fed is concerned about recession risk, he said, noting often-cited statistics that recessions tend to follow rate cuts by about 18 months. He encouraged investors to take that spread with a grain of salt, however, as it took 69 months for a recession to form after the 1995 rate cuts, which was arguably a soft landing, he said.

Chang highlighted the unique situation the country finds itself in compared with past rate-reduction periods. The economy continues to add jobs, retail sales are positive and cash savings are near-record high.

Change asked "So the rate cutting climate we're in right now is arguably different this time, but where does that leave us?"

"Wall Street is anticipating the federal funds rate will move to the mid-3% rate by summer next year and reach 3% by the end of 2025, so Wall Street's betting the Fed will continue to cut rates."

That would be good news for CRE investors, barring a recession. The expectation of further rate cuts over the next several months is already spurring aggressive bidding on some multifamily, industrial and retail assets. Northeastern and West Coast gateway markets that were less impacted by pricing pressure and development in the last cycle, are seeing the most activity, said Chang. Institutional investors are also coming off the sidelines and re-engaging as the investment climate starts to shift.

"Falling interest rates could spawn downward pressure on cap rates, but to get there, we need to see an aggressive buyer pool with ready access to relatively low-cost debt capital, and we're not there yet," said Chang. "Whether we get there, that's still up in the air. From my perspective, the commercial real estate market has shifted gears, and the outlook for most property types is generally positive."

WASHINGTON – The Federal Reserve on Wednesday enacted its first interest rate cut since the early days of the Covid pandemic, slicing half a percentage point off benchmark rates in an effort to head off a slowdown in the labor market.

With both the jobs picture and inflation softening, the central bank’s Federal Open Market Committee chose to lower its key overnight borrowing rate by a half percentage point, or 50 basis points, affirming market expectations that had recently shifted from an outlook for a cut half that size.

Outside of the emergency rate reductions during Covid, the last time the FOMC cut by half a point was in 2008 during the global financial crisis.

The decision lowers the federal funds rate to a range between 4.75%-5%. While the rate sets short-term borrowing costs for banks, it spills over into multiple consumer products such as mortgages, auto loans and credit cards.

In addition to this reduction, the committee indicated through its “dot plot” the equivalent of 50 more basis points of cuts by the end of the year, close to market pricing. The matrix of individual officials’ expectations pointed to another full percentage point in cuts by the end of 2025 and a half point in 2026. In all, the dot plot shows the benchmark rate coming down about 2 percentage points beyond Wednesday’s move.

“The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance,” the post-meeting statement said.

The decision to ease came “in light of progress on inflation and the balance of risks.” Notably, the FOMC vote was 11-1, with Governor Michelle Bowman preferring a quarter-point move. Bowman’s dissent was the first by a Fed governor since 2005, though a number of regional presidents have cast “no” votes during the period.

“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal,” Chair Jerome Powell said at a news conference following the decision.

Trading was volatile after the decision with the Dow Jones Industrial Average jumping as much as 375 points after it was released, before easing somewhat as investors digested the news and considered what it suggests about the state of the economy.

Stocks ended slightly lower on the day while Treasury yields bounced higher.

“This is not the beginning of a series of 50 basis point cuts. The market was thinking to itself, if you go 50, another 50 has a high likelihood. But I think [Powell] really dashed that idea to some extent,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “It’s not that he thinks that’s not going to happen, it’s that he’s not he’s not pre-committing to that to happen. That is the right call.”

The committee noted that “job gains have slowed and the unemployment rate has moved up but remains low.” FOMC officials raised their expected unemployment rate this year to 4.4%, from the 4% projection at the last update in June, and lowered the inflation outlook to 2.3% from 2.6% previous. On core inflation, the committee took down its projection to 2.6%, a 0.2 percentage point reduction from June.

The committee expects the long-run neutral rate to be around 2.9%, a level that has drifted higher as the Fed has struggled to get inflation down to 2%.

The decision comes despite most economic indicators looking fairly solid.

Gross domestic product has been rising steadily, and the Atlanta Fed is tracking 3% growth in the third quarter based on continuing strength in consumer spending. Moreover, the Fed chose to cut even though most gauges indicate inflation well ahead of the central bank’s 2% target. The Fed’s preferred measure shows inflation running around 2.5%, well below its peak but still higher than policymakers would like.

However, Powell and other policymakers in recent days have expressed concern about the labor market. While layoffs have shown little sign of rebounding, hiring has slowed significantly. In fact, the last time the monthly hiring rate was this low – 3.5% as a share of the labor force – the unemployment rate was above 6%.

At his news conference following the July meeting, Powell remarked that a 50 basis point cut was “not something we’re thinking about right now.”

For the moment, at least, the move helps settle a contentious debate over how forceful the Fed should have been with the initial move.

However, it sets the stage for future questions over how far the central bank should go before it stops cutting. There was a wide dispersion among members for where they see rates heading in future years.

Investors’ conviction on the move vacillated in the days leading up to the meeting. Over the past week, the odds had shifted to a half-point cut, with the probability for 50 basis points at 63% just before the decision coming down, according to the CME Group’s FedWatch gauge.

The Fed last reduced rates on March 16, 2020, part of an emergency response to an economic shutdown brought about by the spread of Covid-19. It began hiking in March 2022 as inflation was climbing to its highest level in more than 40 years, and last raised rates in July 2023. During the tightening campaign, the Fed raised rates 75 basis points four consecutive times.

The current jobless level is 4.2%, drifting higher over the past year though still at a level that would be considered full employment.

“This was an atypical big cut,” Porceli said. “We’re not knocking on recessions’ door. This easing and this bit cut is about recalibrating policy for the fact that inflation has slowed so much.”

With the Fed at the center of the global financial universe, Wednesday’s decision likely will reverberate among other central banks, several of whom already have started cutting. The factors that drove global inflation higher were related mainly to the pandemic – crippled international supply chains, outsized demand for goods over services, and an unprecedented influx of monetary and fiscal stimulus.

The Bank of England, European Central Bank and Canada’s central bank all have cut rates recently, though others awaited the Fed’s cue.

While the Fed approved the rate cut, it left in place a program in which it is slowly reducing the size of its bond holdings. The process, nicknamed “quantitative tightening,” has brought the Fed’s balance sheet down to $7.2 trillion, a reduction of about $1.7 trillion from its peak. The Fed is allowing up to $50 billion a month in maturing Treasurys and mortgage-backed securities to roll off each month, down from the initial $95 billion when QT started.

Another Sunset Strip development that would combine housing and a hotel under a single roof has received the go-ahead from the City of West Hollywood.

This week, the West Hollywood City Council voted to approve plans from Silver Creek Development which would redevelop a block-long stretch of Sunset Boulevard which is home to the Viper Room, among other buildings. The 11-story building, named 8850 Sunset Boulevard for its address, would include:

• a 90-room, five-star hotel;

• 78 studio, one-, two-, and three-bedroom homes (including 16 affordable units);

• approximately 28,000 square feet of restaurant, cafe, and bar space;

• a 6,748-square-foot replacement space for the Viper Room; and

• parking for 232 vehicles.

Arquitectonica is designing 8850 Sunset, which would rise 161 feet in height, culminating in a rooftop activated by open-air dining. Rendering portray a glass-clad, mid-rise structure with a public plaza at street level and central breezeway cutting through the building toward a park-like space off of Sunset Boulevard. Relm is serving as the project's landscape architect.

An environmental study conducted for the project has previously estimated that construction will occur over an approximately three-year period.

The 8850 Sunset development, first announced 2018 as a larger 15-story building, has gone through multiple iterations over the past six years. Though all versions of the project have combined housing and a hotel within a single structure, the original design from Morphosis has called for a large chasm to be cut into the center of the building.

8850 Sunset follows a series of similar hotel-condominium projects on the Sunset Strip, including the Edition Hotel & Residences and the Pendry Hotel & Residences, and new projects in the works at 8240 and 9034 Sunset Boulevard.

Inflation may not be as high as the government says it is thanks to latency built into the Bureau of Labor Statistics calculation of the Consumer Price Index. Marcus & Millichap SVP of research services John Chang explained the phenomenon in a recent research video.

The CPI analyzes the prices of various goods, including apparel, recreation, education, medical care, food and transportation. The biggest component of CPI is housing costs, which account for 45% of consumer spending. Chang described this calculation as ‘a bit out of proportion’ as the average U.S. household spends between 25% and 30% of their income on housing.

A deeper look into housing costs reveals that 8% of total CPI inflation is driven by rent growth and an additional 27% is driven by owners’ equivalent rent, a somewhat controversial concept among economists. Owners’ equivalent rent is a hypothetical model number meant to represent what a homeowner would have to pay to rent the home they live in, explained Chang. It is based on a renter survey conducted by the Census Bureau of about 5,000 renters each quarter.

This creates a latency issue because most renters are on an annual lease, so their rent changes once a year rather than month to month. This means it can take up to a year for data from the renter survey to capture actual rent movement. As a result, inflation is underreported when rents rise quickly and overreported when rent growth slows, said Chang.

Some economists advocate for eliminating owners’ equivalent rent in the inflation measurement, which would put the current CPI inflation rate at about 2.4% instead of the current reading of 3.3%. Alternatively, using data sources like Zillow to calculate primary residence inflation would put today’s CPI inflation rate at 2.6% to 3%. If headline inflation were down to about 2.6%, the Fed would likely be inclined to cut interest rates, said Chang.

“Basically, the Federal Reserve is setting rate policies based in part on old data,” said Chang. “They’re driving by looking in the rearview mirror.”

The good news, said Chang, is that available data is already showing what the housing component of CPI will do over the next year. Apartment rents only went up by 1.2% in the past 12 months, so housing inflation should continue to fall, he said.

After over a decade of planning and debate, the Los Angeles City Council voted Tuesday to move forward with renovation and expansion plans for the Los Angeles Convention Center.

The $54 million proposal essentially adds more space to the center's exhibit hall, meeting rooms and multi-purpose room space, in preparation for the 2028 Olympics.

The city-owned Convention Center is scheduled to be the venue for boxing, fencing, taekwondo and table tennis during the 2028 Summer Olympics.

The council voted 13-1 to allocate the money and move forward with pre-construction work, though several members expressed concerns over the tight timeline the city would face to complete the project.

The preliminary work will help the city determine if the remodeling on the 1971-built building can be done on time, and if the result shows it can't, then the project could be terminated.

"Not only will L.A. have a world-class Convention Center that we can be proud of just in time for the world stage, but it's also going to bring thousands of jobs, permanent and temporary jobs," Councilman Curren Price said.

Within the proposal, none of the existing facilities would be demolished, and new construction would connect some of the buildings, adding 190,000 square feet to exhibit hall space, 55,000 square feet of meeting room space and 95,000 square feet of multipurpose space.

If the Convention Center project is feasible, the city would pay for the construction but the work would be done through a private-public partnership with Anschutz Entertainment Group, which operates the center, and development firm Plenary Group.

The impact of the Federal Reserve keeping interest rates higher for longer has filtered into a large swath of the economy, including commercial real estate. According to the Wall Street Journal, big banks have set aside large reserves in case the commercial real estate sector begins to truly falter.

Marcus & Millichap CEO Hessam Nadji (MMI) joins Yahoo Finance for the latest edition of Real Estate: The New Reality to give insight into to the connections between the Fed cutting interest rates and the sentiment around commercial real estate.

Nadji lays out some of the correlation between the Fed and the sector: "There's a direct correlation between the groups, the entire sector's valuation movement, and Fed sentiment. We saw a big run-up in the sector's valuations late last year when interest rates were coming in. The 10-year Treasury had peaked around 5% and then boom, all the way back down to 4% and you saw the stock prices go up accordingly and when the Fed basically changed its mind again given the inflation readings of the last couple of weeks coming in hotter than expected and now the notion of delaying the easing cycle you see the stocks are under pressure again so there's a direct correlation between Fed expectations and interest rates."

Metro and elected officials on Wednesday celebrated nearly $900 million in federal funding for the Los Angeles region to support transportation and infrastructure projects ahead of the 2028 Summer Olympic Games.

"On behalf of L.A. Metro, it is an honor to be here with leaders who have the key vision and strong focus to ensure that our region is prepared to welcome the world for the 2028 Olympics and Paralympic Games," Metro CEO Stephanie Wiggins said during a Wednesday morning news conference at Exposition Park.

The money comes from a congressional spending package signed into law by President Joe Biden, and from new federal grant funding. A large share of the money -- $709.9 million -- will go toward two L.A. Metro projects: the East San Fernando Valley Light Rail Transit Project and sections two and three of the D (Purple) Line Subway Extension Project.

In addition to the $709.9 million secured through the U.S. Department of Transportation's New Starts and Expedited Project Delivery Pilot Programs, the region will also receive $160 million in new federal grant funding through the Reconnecting Communities Pilot Program and the Neighborhood Access and Equity Programs.

Sen. Alex Padilla, D-California, noted the recently passed appropriation bills in September 2023 gave a "sneak preview" of investments coming to the L.A. area.

The Purple Line subway extension is being constructed in three sections, and will connect downtown with West L.A. It is part of a broader 9-mile project that will provide a high-capacity alternative to driving for commuters.

Metro anticipates receiving $165 million for section two (between Wilshire/La Cienega and Century City) and $478 million for section three (between Century City and Westwood), with all sections expected to open prior to the 2028 Olympics.

The East San Fernando Valley Light Rail Transit Project will receive $66.9 million to improve connections and access to crucial destinations. The first segment of the line is a 6.7-mile at-grade alignment that will run along Van Nuys Boulevard and will include 11 new transit stations.

"So today as part of the $900 million that we're celebrating, let's acknowledge that $140 million of federal funding is specifically targeted to reconnect communities here in Los Angeles,'' Padilla said. "It was one of the first bills I introduced in 2021, Removing Barriers and Creating Legacy. It became a component of the bipartisan infrastructure law."

That particular pot of funding would improve bus services, bring online bikeshare stations and create mobility hubs that will "help the people of L.A. get around more efficiently," he added.

Rep. Jimmy Gomez, D-Los Angeles, noted there should be a shared vision for the Olympic Games to be inclusive and not exclusive. He said money to prepare the L.A. region should also be used to "right the wrongs of the past."

Of the $160 million coming in from federal grants, the money will fund the following programs:

• $139 million for Metro to reconnect communities across highway and arterial barriers by creating multimodal investments: bus speed and reliability improvements, first/last mile strategies and projects, mobility hubs, and non-capital mobility solutions;

• $9.96 million for a partnership between Metro, Caltrans and L.A. County Public Works for construction of a dedicated pedestrian and bicycle overcrossing adjacent to the existing Humphreys Avenue bridge over the 710 Freeway in East Los Angeles;

• $5 million for the Port of Los Angeles to support a pedestrian bridge over two mainline freight tracks, which can accommodate emergency vehicles and connect the economically disadvantaged Wilmington community with the Wilmington Waterfront;

• $3.59 million for Friends of the Hollywood Central Park. In partnership with the city's Department of Recreation and Parks, Healing Hollywood aims to use community planning grant funds to take the Hollywood Central Park, a cap park over the Hollywood Freeway, from a concept design to a shovel-ready project; and

• $2 million for the city of Los Angeles to support community planning activities with the aim of creating 1.7 acres of new open space in one of the most park-poor areas of the city and remove a high-injury arterial adjacent to a high concentration of elementary schools by closing Wilshire Boulevard to vehicular traffic from Alvarado Street to Carondelet Street.

Casey Wasserman, the chair of LA28, the committee organizing for the Olympic Games, emphasized that when the world comes to Los Angeles, they will experience "games that celebrate the people and the communities of our city,"
as well as the "transportation system that connects the people and the communities of our city."

"We are well positioned to host the greatest games on Earth, worthy of our city, worthy of our communities, and we can't wait for 2028," Wasserman said.

Although the city touts its plans and generous funding, one expert said they may be inefficient for Los Angeles.

New supply can radically shift the market equilibrium and dramatically impact the performance of existing assets, according to a new video from Marcus & Millichap.

Generally speaking, construction costs surged during the pandemic as supply chains broke down, said John Chang, National Director Research and Advisory Services, Marcus & Millichap.

But prices generally stabilized in 2023, and they’ve been relatively consistent for about a year. Overall, they’re about 26% higher than they were in 2019.

Lumber costs are running about 16% higher than before the pandemic.

Steel prices are about 65% higher, while aluminum now stands about 52% higher than its average price from 2019.

Concrete costs have been rising at a slow but steady pace and are about 39% higher than in 2019.

Construction labor costs, which now stand about 21% higher than their 2019 levels.

Interest rates on construction financing currently are in the 8% to 10% range, which is up from 2019 when it was in the 5% to 6% range, according to Marcus & Millichap.

“Depending on the property type, location, financing used, etc., construction costs are up by approximately 25% to 50% compared to where they were prior to the pandemic,” Chang said.

As for new supply trends for office, Marcus & Millichap is expecting about 67 million square feet of new office to come online in 2024, which seems like a lot, considering that office vacancy rates are forecast to reach an all-time high of 17.8%, Chang said. Construction is roughly half the level seen in the early 2000s, and the majority of the pipeline is build-to-suit mostly in the suburban areas, according to Marcus & Millichap.

Retail’s construction pipeline only has about 40 million square feet coming online in 2024, Chang said.

“That’s about 75% below the construction pace of the early 2000s, and about 70% of the expected completions will be single-tenant retail properties,” he said.

“Retail construction has been down significantly since the global financial crisis, and that’s part of why the retail sector’s outperforming with a forecast vacancy rate of 4.8% in 2024. That’s just a bit above the 4.6% record low of the third quarter last year.”

At the other end of the construction pipeline spectrum, with record or near-record deliveries, are industrial and multifamily.

Marcus & Millichap anticipates the completion of about 360 million square feet of industrial space in 2024, which is coming off the addition of about 400 million square feet in both 2022 and in 2023.

For about eight years straight, developers have been growing the inventory of industrial space by about 2% per year, he said.

“Industrial vacancy rates increased by a significant 170 basis points in 2023, and we expect the vacancy rate to rise by another 80 basis points to 6.1% in 2024, about on par with where we were at the end of 2014,” according to Chang.

Meanwhile, apartment construction is expected to set a record in 2024 with the addition of 480,000 new units, an inventory increase of about 2.5%.

“We expect those completions to bump the vacancy rate up by 30 basis points to 6.1%, which suggests a very solid level of net absorption this year; about 390,000 units, one of the better years on record,” Chang said.

Keep in mind, Chang said, the US still faces a housing shortage on a macro level, somewhere around 3 million housing units and the cost of home ownership is out of the reach of most. “Only about 25% of US households could qualify for a Freddie Mac mortgage on a median-priced home, even if they had the needed down payment,” he said.

Furthermore, the affordability gap between the average monthly rent and the monthly house payment on a median-priced home is about $1,300 per month; an all-time high.

“So, while the huge wave of apartment construction is needed, I think the completions will outpace absorption in 2024,” Chang said.

That said, the apartment construction pipeline thins pretty significantly in 2025 and beyond, suggesting that demand will once again outpace new supply within the next couple of years, Chang said.

The United States’ economic outlook for 2024 looks favorable, according to Mark Zandi, chief economist, Moody’s Analytics, and other panelists featured in last week’s Cutting Through Uncertainty: 2024 Economic & CRE Outlook webinar, hosted by Marcus & Millichap.

Commercial real estate’s auspices for the year, meanwhile, are varied by sector, as is often the case, with open-air retail and hotel sectors both offering strong fundamentals, while opportunities in office and self-storage will likely be more difficult to find (but potentially more lucrative).

The economy

Job growth will slow in 2024 but will remain solid across most industries, with unemployment continuing to hover below 4 percent and inflation continuing to drop toward 2 percent, said Zandi.

If the economy were to be adding 100,000 jobs a month a year from now, that would sound right to Zandi, he said.

The flow of immigrants into the US in recent years (2 million 2022 and 3 million in 2023) is a trend that supports increased labor-force growth and could support job growth in coming years.

Meanwhile, consumers are spending just right, said Zandi. They are not spending with abandon but in a way that supports economic growth and businesses.

“As long as the consumer does their thing, hangs tough, continues to spend, I think the economy should be just fine,” he added.

Of course, that isn’t to say a smooth economic year is a shoo-in for the United States. Marcus and Millichap and Moody’s Analytics provided a slide in the webinar that showed various situations and the severity of risk on one axis and the likelihood of occurring on the other axis.

Among possible risks in 2024 is a spike in oil prices, which could come from continued Middle East tensions and conflict and from a possible resurgence in demand from China.

The banking system, which responded aptly in March 2023 when problems emerged with banks such as Silicon Valley Bank, is “still under a lot of pressure,” said Zandi. The yield curve remains inverted and CRE portfolios are posing to be an issue for some mid- to small-sized banks.

Zandi also said, “Loan growth has slowed because of the tightening in underwriting, and regulatory costs are on the rise as regulators are asking banks to raise more capital and liquidity, and risk-management costs are rising.”

The U.S. fiscal predicament could also hurt its economic growth potential. Zandi discussed the publicly traded debt-to-GDP ratio, observing, “We need to make some significant changes here in our fiscal trajectory,” though he noted that such changes will likely come in 2025, after this year’s election, when the then-president will be faced with some difficult fiscal decisions.

Commercial real estate

“Retail fundamentals are very strong,” said Jessica Zaski, executive vice president, chief transactions officer, ShopCore.

While retail transactions were down roughly 50 percent year-over-year in 2023, that reduction was much better off than multi-family and logistics, said Zaski. “We are hearing more and more groups who haven’t historically, or in more recent history, been in retail and are wanting to come back in – on the institutional side, the sovereigns, etc.,” observed Zaski. “So it’s actually been overall a very positive story.”

Zaski said that many of ShopCore’s retailers have mastered the omnichannel means of meeting customers in the way they want to be met, whether that means via a traditional in-store shopping experience, ordering online and picking up from the store, or having the store operate as its own distribution point. Accommodating the customer’s shopping desires has been critical in successful retail operations.

Meanwhile, office generally continues to face a difficult environment, as demand for old stock and therefore its value is down notably. Sean Bannon, managing director, head of U.S. real estate, Zurich Alternative Asset Management, said that his firm therefore is focusing on trying to have a diverse office portfolio, honing in on boutique offices and interesting submarkets with good amenities.

“I think the issue with office is really just getting to almost a repriced set of expectations and fundamentals around what we think a steady state will look like a couple years forward, to begin to trade,” said Bannon. “Because there is a very, very significant issue with near-term debt refinancing, [with] the funding gap there.”

The self-storage sector, on the other hand, experienced a counter-cyclical trend during the pandemic, as its vacancy rates dropped. Since then, real changes have occurred in the industry, said John Chang, senior vice president, research services, Marcus & Millichap. Vacancies have drifted upward and there has been significant consolidation in management, operations and ownership of self-storage, with various big mergers and acquisitions taking place in the ownership space, such as Public Storage’s acquisition of Simply Self Storage for $2.2 billion.

The wave of further self-storage construction that is on the horizon could create some further challenges for the sector, said Chang.

While the hotel industry “took it right on the chin during the pandemic,” according to Chang, the fundamentals are now strong for the sector, with occupancy rates at levels close to their pre-pandemic rates and RevPAR at a record high.

Housing prices remain extremely high due to a lack of supply and high mortgage rates. Zandi said he expects some kind of forthcoming correction in housing prices, though this likely could be prices going flat.

Zandi added that new homes, particularly in the affordable and middle part of the market, need to be built to meet demand. He voiced a hope that a wave of such construction could come after we get to the other side of high interest rates.

“Hopefully, lawmakers can make a few policy changes to help with supply,” said Zandi, mentioning a low-income housing tax credit that is popular in Congress and is currently included in tax legislation making its way through the legislative branch.

Zandi said the tax credit “would be, I think, one of the best ways to incentivize more affordable rental building very quickly, and that would be very helpful. So, hopefully, the lawmakers can get it together and pass that piece of legislation.”

Overall, Bannon concluded his remarks in the webinar by saying that he thinks 2024 and 2025 deals will be a great vintage, adding, “Some real interesting opportunities, driven by the problems of existing owners, [could help] joint venture rise to some really, really good and lucrative long-term real estate investments, so we’re pretty constructive on the next 12-months and the opportunities we’re going to see.”

After a more-than-sluggish 2023 when it comes to commercial real deals, Marcus & Millichap sees a revival in 2024, according to John Chang, its National Director of Research and Advisory Services.

Leading the revival is that the industry is resilient, interest rates have started to come down and will continue to do so, and approximately $240 billion of capital targeting commercial real estate is a waiting entry to the market.

Depending on how you measure it sales were down by 20% to 25% compared to the average number of transactions between 2014 and 2019, said Chang, speaking on a company news video.

“Commercial real estate sales activity was pretty consistent over that span, but I anticipate we’ll see a recovery in 2024, maybe not to the levels we saw in 2021 or 2022, which were abnormally active, but certainly moving back into alignment with where we were before the pandemic,” he said.

The consensus baseline economic forecast now calls for a soft landing with comparatively low recession risk in most predictions, according to the video.

“We’re on the backside of the inflation curve with virtually all key inflation measurements showing significant declines since they peaked in mid-2022,” Chang said. “Additionally, job creation remains positive, but it has slowed steadily over the course of the last year. That trend aligns well with the soft-landing scenario.”

Marcus & Millichap’s current forecast for job creation in 2024 is 1.7 million jobs. It expects the unemployment rate to remain range-bound near 4%.

“On top of that, a variety of other indicators remain modestly positive, including inflation-adjusted core retail sales, service industry metrics, consumer sentiment, and corporate profits,” Chang said.

“So basically, the economy should give commercial real estate a modest tailwind in 2024, but more importantly, the generally positive outlook will help alleviate uncertainty and moderate caution levels among investors. That psychological dimension is key to a market recovery.”

Secondly, interest rates are falling, and Chang said the broad-based expectation is that they’ll continue to move lower over the course of the year.

The 10-year treasury peaked at about 5% in October last year and has since come back down to the 4% range, and at the Federal Reserve’s meeting in December, Chairman Powell suggested rate reductions could begin this year even before inflation reaches the Fed’s 2% inflation target, he said.

At present, Wall Street has placed a 60% likelihood that the Fed will reduce rates by 25 basis points to 5% in March, according to the video, and by June, there’s a 50% likelihood the overnight rate will be reduced to 4.5%.

Furthermore, by September, Wall Street is placing 80% odds of rates being 4.25% or lower, and by December, Wall Street believes the Fed funds rate has an 85% likelihood of being 4% or lower.

“Those probabilities change by the day, sometimes by the hour or even by the minute, but they do give a good general perspective on where Wall Street investors are putting their money based on the current outlook,” Chang said.

“As the cost of debt capital comes down, it will help close the buyer-seller expectation gap supporting investment activity. And unlike in 2022 and 2023, when rising rates were derailing deals, falling rates could bolster deal flow.”

The sheer volume of flow will be intense based on the capital that’s waiting to be placed, according to the video.

The approximate $240 billion of “dry powder” is close to the record level set in 2021, Chang said.

“Of course, it’ll take time for the capital to be placed, and sales activity will likely ramp up over the course of the year, but by the second half of 2024, activity levels may be back in alignment with the pre-pandemic norm,” he said.

Granted, there are always risks, he said.

“The Fed could hold rates too high for too long,” according to Chang. “There could be a government shutdown at the end of January. Additional geopolitical conflicts could erupt, or existing ones could spread.

“For now, though, it looks like we’ve cleared most of the hurdles that disrupted the market last year and the investment climate is improving.”

In a significant stride towards urban transit innovation, the city of Inglewood in California is set to construct a 1.6-mile automated people mover system, thanks to a colossal federal funding of approximately $1 billion. The capital investment grant, courtesy of the Federal Transit Administration, shoulders half of the total expenses required for the ambitious $2 billion Inglewood Transit Connector project. The project’s primary objective is to create an efficient transit link between the Metro K Line and pivotal locations including the Kia Forum, SoFi Stadium, and the soon-to-be home of the Los Angeles Clippers, the Intuit Dome.

Moving Towards Full Funding

Prior to this, Inglewood had successfully raised $873 million through a coalition of local, state, and federal resources. This latest funding infusion takes the total to around 85% of the necessary budget, incorporating a $200 million contingency reserve. Thus, the city is now within striking distance of the budget required to bring this transit vision to life.

Mayor Butts Welcomes the Investment

Inglewood’s Mayor, James T. Butts Jr., hailed the federal investment, lauding the cooperative efforts of various governmental tiers. He voiced optimism about the project’s potential to revolutionize transportation alternatives and stimulate the local economy. This is particularly relevant for the city’s downtown area, especially along Market Street.

Targeting the 2028 Summer Olympics

With an estimated capacity to carry 11,000 riders per hour, the proposed transit system is scheduled to be operational by the 2028 Summer Olympics. However, the project has not been without its critics. A city council-approved plan from April that will displace 41 businesses and 305 workers to make way for the construction of the people mover’s stations and maintenance facilities has drawn flak. Although the city has pledged to cover relocation costs, business owners remain apprehensive about the potential disruption to their operations.

Apartment investment should strengthen across the United States by the second half of 2024 as more stable interest rates give buyers and sellers the confidence to narrow the gap in prices, multifamily executives said during Marcus & Millichap’s annual discussion about prospects for the new year.

Executives representing companies across the U.S. sounded a positive note during an online broadcast hosted by the Calabasas, California-based brokerage firm. They reasoned the market had nowhere to go but up after U.S. apartment investment cratered this year as investors reacted to higher interest rates, recession fears and an inability to agree on deal prices caused buyers and sellers to step back from the market.

“I’m optimistic there will be more opportunity for investment as we move into 2024 and there will be some good buys in the near future. It’s hard to imagine that there will be less,” said Doug Root, co-founder and managing partner of Blackfin Real Estate Investors, an Arlington, Virginia-based multifamily investment firm that owns more than 11,000 units. “There’s a culmination of rents slowing a bit and more investors coming to the realization that valuation hasn’t materially changed."

The economy is in a better place now than when inflation flared and the Federal Reserve moved to tame it by imposing rate hikes that made financing much more expensive. Many economists now predict the economy can avoid recession and maintain steady employment growth, allowing the Fed to — if not immediately ease rates — at least stop raising them.

John Chang, senior vice president of research for Marcus & Millichap, said during the broadcast that analysts now project that the economy will grow 2.4% in 2023.

“This is the soft landing model that the Federal Reserve is hoping for, where the pace of job additions has been steadily slowing down,” Chang said. “The U.S. is expected to add close to 3 million jobs in 2023 and another 1.7 million in 2024, with the pace slowing during the year. We still have a labor shortage, but it is tapering, and we’re moving in the right direction.”

Inflation, Debt Continue To Pose Risk

Inflation, and high levels of debt held by consumers, businesses and owners of commercial real estate are likely to continue to be risks next year, but the unemployment rate and job creation are still strong, Chang added.

“We’re seeing some really good performance numbers, especially with the employment market, and those are all really positive for the multifamily market,” Chang said.

Multifamily fundamentals are staying relatively strong, particularly in the Midwest, which right now is outperforming every other region of the country, said John Kinzelberg, CEO of Chicago-based Highgate Capital Group, which typically invests in value-added cities in that region of the country. “We believe that multifamily performance will only get better over the next three to five years, which is our investment time horizon.”

While developers have finished a record number of units this year, "the good news is that construction starts have come down quite a bit because of the high cost of construction financing," said Jeff Tripaldi, managing partner with Tilden Properties, which invests in value-added properties in California and Nevada. "I think on the back half of 2024 and into 2025, it's probably there will be less new supply.”

Less supply could trigger new interest among investors in existing properties, helping sales to rev up again.

That would help the multifamily sector retain its spot as the top choice for commercial real estate investors, panelists said.

With the city’s COVID-era freeze on rent increases set to expire at the end of January, the Los Angeles City Council signed off on a compromise proposal Tuesday that will allow landlords to raise rents next year by 4% — spurning calls from some tenant advocates to extend the freeze.

The plan will apply only to units that fall under the city’s rent stabilization ordinance, which covers roughly three-quarters of all multifamily rental units in the city.

The proposal was approved on a 10-2 vote, though it still has to be formally drafted by the city attorney’s office and return to the council for another vote before it is finalized.

Councilmembers Curren Price and Katy Yaroslavsky and Council President Paul Krekorian recused themselves because they own rental properties.

Under the measure, landlords who pay tenants’ gas and electric utilities will be allowed to raise rents by 6%. Had the council not approved Tuesday’s compromise, allowable increases would have been higher: up to 7% as a base, or up to 9% if landlords pay utilities.

Tenant advocates had argued that allowing such a substantial rent increase could be catastrophic for tenants on the margins, particularly when the city has been putting enormous resources toward keeping vulnerable renters housed. They raised similar fears about the 4% increase during Tuesday’s meeting.

Housing providers pointed out that they’ve already been unable to raise rents for more than three years, at a time of soaring inflation and many other increased expenses.

Councilmembers Traci Park and John Lee voted against the measure, with Park raising concerns about the burdens that housing providers — particularly mom-and-pop landlords — have had to shoulder during the pandemic.

Councilmember Hugo Soto-Martínez, a progressive who joined the council in December and has been an outspoken tenant advocate, had proposed freezing stabilized rents for an additional six months, but that plan failed to make it out of the council’s housing and homelessness committee last week.

The 4% cap was the result of a compromise proposed during committee by Councilmember Bob Blumenfield, who raised potential legal issues around a continued freeze.

Tuesday’s meeting stretched into the afternoon, with the council debating the policy on the floor for nearly an hour. Councilmember Eunisses Hernandez — a political ally of Soto-Martínez and one of the council’s leftmost members — proposed two additional amendments. Both failed.

Hernandez’s first amendment, which garnered three votes, would have undone Blumenfield’s compromise and returned to a freeze on rent increases until the Housing Department finished studying the matter and the council took action on the report. Hernandez also proposed capping increases at 4% regardless of whether landlords pay utilities.

Councilmember Tim McOsker, a more politically moderate council member who also took office in December, introduced a separate proposal that would have differentiated between “small housing providers” who own 12 or fewer units and corporate landlords.

McOsker proposed allowing small housing providers to raise rents by up to 7%, with large landlords capped at 4%. The main sticking point appeared to be a lack of data, with the general manager of the Los Angeles Housing Department, Ann Sewill, saying the department wouldn’t be readily able to discern between the two categories.

Just before the amendment was to be voted on, McOsker said he could see it wasn’t going to pass and pulled it, instead proposing a new amendment that would ask the city attorney’s office and the Housing Department to report back within 30 days on the feasibility of his plan for small housing providers.

The meeting — which by then was well into its fifth hour — then devolved into several minutes of procedural chaos about whether or not McOsker’s initial amendment could be removed, with one council member audibly telling an aide, “I love the drama.”

The council ultimately unanimously approved McOsker’s request for a report.

During public comments, Iran Daniel, an Altadena resident who co-owns a rent-stabilized triplex in West Adams, urged council members to allow the maximum proposed rent hike.

“I am a struggling actor. I have been impacted by the SAG[-AFTRA] strike that just finished, and I have had to take from my own savings to pay for the tenant that couldn’t,” Daniel said. “We urge you to allow the 7% rent increase so that we can give our tenants the properties that they deserve, so that we can take care of their needs, so that we can make ends meet. Our rents are not enough.”

Sofia Mendoza, a South L.A. tenant with the Alliance of Californians for Community Empowerment, encouraged the council to extend the freeze for six months.

“I’m going to be severely affected because my husband is the only one who works ... and sometimes the property owners increase rents without moderation, and that would affect a lot of us, not just me,” she said in Spanish. “I ask all of you to please approve this motion.”

The city’s action follows a similar move made by the county last week.

Los Angeles County supervisors extended — and slightly increased — a soon-to-expire cap on rent increases. The county’s temporary 3% cap on annual rent increases in unincorporated areas was meant to expire in December.

But the supervisors voted to increase the cap to 4% and extend it through June, sparing tenants in unincorporated areas from a dramatic rent hike for an additional six months. The cap applies to all rent-controlled units in unincorporated L.A. County — those built before 1995, as well as all mobile homes.