Capital Markets Report

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1Q 2025
Newmark Research presents the First Quarter 2025 Capital Markets Report.

4 Q19 US Capital Markets Report social v1

Economy. U.S. GDP contracted 0.3% in the first quarter of 2025, reflecting early signs of economic softness. Still, this performance primarily serves as a baseline ahead of the Liberation Day tariff announcements, which are expected to reshape growth trajectories. Newmark research has put out a more comprehensive review of how to think about tariffs. In the near term, however, the outlook points to slower growth and higher prices. As of late April 2025, significant uncertainty remains around final Administration policy. That ambiguity continues to weigh on investment and hiring decisions, though the precise effects are difficult to quantify with policy still in flux. The unemployment rate rose to 4.2% in the first quarter, up 10 basis points from year-end 2024. Markets are currently pricing in four rate cuts by year-end. Meanwhile, 10-year Treasury yields remained volatile but largely held within the 4.0% to 4.5% range. GDP was dragged down in large part by a surge in imports as firms looked to front-run potential tariffs. Despite the headline contraction, investment was stronger than anticipated—likely driven by tariff-related incentives
Debt Markets. Commercial real estate (CRE) debt origination maintained strong momentum in the first quarter of 2025, though volumes remain well below pre-pandemic norms. Origination activity rose 42% year-over-year compared to the first quarter of 2024. While the number of active lenders remains meaningfully lower, our estimate for the first quarter is likely to be revised upward. Originations increased across all major sectors, with office, senior housing and hotels leading the way. Bank lending was particularly notable—just 4% below first-quarter averages from 2017 to 2019. This acceleration in activity comes as the market prepares to absorb $2.0 trillion in debt maturities from 2025 to 2027. Notably, 37% of this maturing debt was originated when the federal funds rate was below 25 basis points, compared to 433 basis points today. A substantial portion of loans—especially recent vintages across most property sectors, including a large share of office debt—are either underwater or nearing that threshold. We estimate that $582 billion in debt maturing between 2025 and 2026 could be potentially troubled.
Equity Markets. Investment sales increased 18% year-over-year in 2025Q1 YTD but down 18% compared with the 2017-to-2019 average. Office sales declined 16% vs. the first quarter of 2025, while multifamily was up 42%. Liquidity has been strongest for smaller transactions. Deals under $100M made up 67% of volume traded in the last four quarters. Institutional investment was up 66% YTD vs. 2024 with a 49% increase in Office acquisitions, though institutional remains net sellers of Office.
Supply of Capital. Dry powder at closed-end funds currently sits at $328 billion, down 13% since December 2022. Dry powder at value-added, opportunistic and debt funds are now well-off their peak levels, with most of that targeting Residential and Industrial properties. Much of this dry powder was raised from prior vintages. ODCE fund flows improved somewhat, but showed net outflows for a 10th straight quarter. Redemption queues remain an issue for many funds, driven by persistent if narrowing gaps between NAV and market values.
Pricing and Returns. Transaction markets now show clear increases in transaction cap rates, following the public markets. Nonetheless, both in the private and public markets, cap rates appear distinctly unattractive relative to the cost of debt capital, possibly excepting office REITs. This is not surprising in the private markets, where transaction volumes are muted and reflect selection bias and appraisal-based valuations lag market conditions. Extremely narrow cap rate spreads in the REIT markets are harder to justify and seem to require a rapid decline in debt costs, historically abnormal NOI growth or a combination of the two. Notwithstanding the structural deficiencies in NCREIF valuations during periods of rapid change like today, NCREIF NPI broadly improved in 1Q25 and posted its second straight quarter of positive returns. All sectors recorded positive total returns, including Office. 71% of markets recorded positive total returns in 1Q25 roughly the same as 1Q24.