Alternative Investments/CRE 2025 Outlook Part 2

We looked at Alter­na­tive Investments/ Com­mer­cial Real Estate 2025 Out­look Part 1 in our last post.   We will review self-stor­age, stu­dent hous­ing, mul­ti­fam­i­ly, and senior hous­ing in that post. We will con­tin­ue is Office, Med­ical Office, Indus­tri­al in this writ­ing. 

Feb­ru­ary 13, 2025

By Al DiNi­co­la, AIF®
DST 1031 Spe­cial­ist & Alter­na­tive Real Estate Advi­sor
NAMCOA® — Naples Asset Man­age­ment Com­pa­ny®, LLC
Secu­ri­ties offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC

Retail, Life Sci­ence, Data Cen­ter and tech­nol­o­gy will be future fea­tured arti­cles. To access the pre­vi­ous post, click here. Alter­na­tive Investments/CRE 2025 Out­look Part 1 — DST Edu­ca­tion and Mar­ket News

Office

There is a move in many sec­tors to increase office atten­dance. We have recent­ly seen this on a fed­er­al lev­el for a num­ber of philo­soph­i­cal, finan­cial and poten­tial polit­i­cal rea­sons. The pri­vate sec­tor com­pa­nies have also begun to require in-per­son employ­ees. These are in the form of man­dates. Stay tuned to see if this strat­e­gy will work and cre­ate increased pro­duc­tiv­i­ty.

Under­per­form­ing assets is the focus of dis­cus­sion. Prop­er­ty own­ers may con­sid­er con­ver­sion into oth­er uses (if local ordi­nances approve). Con­ver­sion into alter­na­tive uses may solve oth­er demand for assets in some areas. Old­er build­ings with high vacan­cy rates may sim­ply not have the required demands of cer­tain ten­ants.  Recent­ly an insur­ance com­pa­ny in Chica­go vacat­ed a much larg­er build­ing and moved into a 40% small­er build­ing.  While there was a loss of rental space the rents were high­er in the new­er build­ing, that pro­vid­ed bet­ter func­tion­al­i­ty and use for the employ­ee.  Bet­ter use may trans­late to more pro­duc­tiv­i­ty.  Ten­ants are demand­ing top tier prop­er­ties.

There is also lim­it­ed new con­struc­tion cre­at­ed by a com­bi­na­tion of high­er inter­est rates and increased con­struc­tion cost.  Prop­er­ties that can be deliv­ered quick­ly (with ten­ant improve­ments) and quick­er occu­pan­cy should be very appeal­ing in many mar­kets.

Many of the Delaware Statu­to­ry Trust (DST) offer­ings have been large cred­it ten­ants repo­si­tion­ing their real estate owned as a sale lease back. The sale enables the com­pa­ny access to cash for upgrad­ing facil­i­ties, equip­ment or expan­sion.  The long lease terms and triple net fea­ture of the DST offer­ing are advan­ta­geous to investors.

Typ­i­cal­ly, all real estate is local. On a nation­al lev­el the office vacan­cy rate hit a record high of 17.7% in 2024 and is pro­ject­ed to rise anoth­er 100 basis points, to near 19% by the end of 2025 (accord­ing to CBRE).

Some of the oth­er points are:

• Lease Rates: Ask­ing rents have risen steadi­ly post-COVID, their rate of growth is expect­ed to remain below 1% with iso­lat­ed new devel­op­ment.
• Lim­it­ed ten­ant demand for old­er build­ings with few­er ameni­ties is forc­ing own­ers to begin drop­ping rates to draw inter­est.
• Net absorp­tion is antic­i­pat­ed to stay flat over the near term as the nation’s uneven recov­ery unfolds. Demand will like­ly stag­nate in the first half of the year as com­pa­nies cau­tious­ly eval­u­ate eco­nom­ic con­di­tions and fed­er­al pol­i­cy shifts under the new admin­is­tra­tion.
• New con­struc­tion starts will remain on hold, hin­dered by ele­vat­ed labor and mate­r­i­al costs and sub­dued demand.

Med­ical Office Build­ing is much dif­fer­ent than Office.

CBRE fore­casts that MOB ask­ing rents will rise by up to 1.8% in each of 2025 and 2026 and vacan­cies will decline slight­ly to 9.46% by the end of 2025 from 9.57% in this year’s third quar­ter. There is a grow­ing demand for health­care ser­vices includ­ing out­pa­tient surgery cen­ters. This mar­ket is also being fueled by the demo­graph­ic indi­ca­tors of baby boomers. There will be more and more demand, which is good news for investors.

The are many types of facil­i­ties includ­ing doc­tors’ offices, clin­ics, urgent care cen­ters as well as build­ings asso­ci­at­ed with hos­pi­tals. Some of the cen­ters being offered as DST are small­er in size and may be all cash offer­ings rather than hav­ing any debt.

One of the oth­er inter­est­ing fac­tors is the rise in employ­ment in the health­care sec­tor. This sec­tor out­paced the over­all growth rate.  Health­care job growth con­tin­ued to be an eco­nom­ic dri­ver in 2024, cre­at­ing 686,600 jobs over the 12-month span and account­ing for 31% of the 2.2 mil­lion jobs cre­at­ed in the over­all econ­o­my last year. (Health­care Pow­ered U.S. Job Growth in 2024 | Health Lead­ers Media)

Addi­tion­al­ly, MOB sales vol­ume increased to $2.51 bil­lion in 2024’s third quar­ter, up 48% from a year ear­li­er. That marked the sec­ond con­sec­u­tive year-over-year increase fol­low­ing near­ly two years of declines. DST offer­ings were lim­it­ed in scope and tend­ed to be all cash offer­ings.  This may cre­ate a chal­lenge for investors exe­cut­ing a 1031 tax deferred exchange with a debt replace­ment require­ment.

There con­tin­ues to be Inter­est in the Indus­tri­al Asset Class

Large ful­fill­ment cen­ters and last mile des­ti­na­tion cen­ters are still in demand. Not only is ama­zon still build­ing but there are also oth­er large dis­tri­b­u­tion cen­ters being devel­oped for automak­ers. There are also small­er ware­hous­es (such as flex spaces) that may be big­ger oppor­tu­ni­ties.  Devel­op­ers are deliv­er­ing addi­tion­al small offer­ings to sat­is­fy the demand. The con­struc­tion starts are expect­ed by late 2025. This will be only in mar­kets where the sup­ply and demand bal­ance has returned. Con­struc­tion costs, inter­est rates and poten­tial reg­u­la­to­ry issues may delay some projects.

A few years ago, the Sup­ply Chain issue sur­round­ed many aspects of the econ­o­my. Much has ease since COVID.  How­ev­er, it is pro­ject­ed there will be pres­sures and risks, dis­rup­tions, delays, and high costs will con­tin­ue. In 2025, last-mile deliv­ery solu­tions will be cru­cial to boost­ing agili­ty by ensur­ing more reli­able deliv­er­ies. More com­pa­nies will adopt route opti­miza­tion strate­gies and crowd­sourced deliv­ery net­works to improve the last mile and adapt to unex­pect­ed delays, mak­ing the sup­ply chain more resilient and flex­i­ble.

There is a con­tin­ued effort to ease sup­ply chain issues with near shoring & re-shoring. This is an attempt to get more prod­uct “On Shore” mean­ing in the USA.  This also is a good indi­ca­tor for the indus­tri­al sec­tor.  The new admin­is­tra­tion has a mis­sion to bring more man­u­fac­tur­ing back to the USA. Anoth­er good long-term sign for indus­tri­al. The DST indus­tri­al offer­ings over the past two years have near­ly out­paced the mul­ti­fam­i­ly offer­ings in num­bers of offer­ings as well as vol­ume of offer­ings. Some indus­tri­al offer­ings may be small bay flex spaces to one mil­lion square feet of auto parts dis­tri­b­u­tion ware­hous­es. How­ev­er, as of Feb­ru­ary 2025 the avail­able indus­tri­al DST offer­ings have decreased, indi­cat­ing active investor inter­est as well as direct­ing invest­ment dol­lars to this asset class.

We want to thank many of the spon­sors who have pro­vid­ed 2024 and 2025 analy­sis includ­ing Inland-Invest­ments, Cap­i­tal Square, Can­tor Fitzger­ald, Brook­field, Star­wood, CBRE, and oth­ers.

NAMCOA® is a SEC reg­is­tered invest­ment advi­so­ry firm that pro­vides com­pre­hen­sive port­fo­lio man­age­ment, finan­cial plan­ning, and fidu­cia­ry deci­sion-mak­ing ser­vices on behalf of retire­ment plan spon­sors. Our Dif­fer­ence is sum­ma­rized by our fidu­cia­ry approach which enables us to bet­ter meet port­fo­lio and retire­ment plan objec­tives, result­ing in stronger risk adjust­ed returns for investors and peace of mind for Clients. We also focus on alter­na­tive real estate invest­ment. Many real estate investors are seek­ing tax deferred solu­tions uti­liz­ing §1031 exchanges or Oppor­tu­ni­ty Zones.

DSTs are not for all investors.  The acqui­si­tion of a DST is for accred­it­ed investors only.  Con­tact your invest­ment advis­er for addi­tion­al details on how a DST may be a solu­tion to your 1031 Exchange and suit­ed for your invest­ment future. For more infor­ma­tion on how to prop­er­ly set up an IRC 1031Tax Deferred Exchange or if you are an accred­it­ed investor and would like addi­tion­al infor­ma­tion on a DST con­tact Al DiNi­co­la at 239–691-8098 or email adinicola@namcoa.com.

This is not an offer to pur­chase or solic­i­ta­tion to pur­chase any secu­ri­ty, as such be made only through an offer­ing mem­o­ran­dum or prospec­tus.  Invest­ing in secu­ri­ties, real estate, or any invest­ment, whether pub­lic or pri­vate, involves risk, includ­ing but not lim­it­ed to the poten­tial of los­ing some or all of your invest­ment dol­lars when you invest in secu­ri­ties. You should review any planned finan­cial trans­ac­tions that may have tax or legal impli­ca­tions with your per­son­al tax or legal advi­sor.   NAMCOA, LLC is a Reg­is­tered Invest­ment Advi­sor, reg­u­lat­ed by SEC (Secu­ri­ties and Exchange Com­mis­sion). Our cor­po­rate office is locat­ed at 999 Van­der­bilt Beach Road, Suite 200, Naples Flori­da 34108. Secu­ri­ties Offered through MSC-BD, LLC, Mem­ber of FINRA/SIPC. 8215 SW Tualatin- Sher­wood Rd, Suite 200, Tualatin, OR 97062.  MSC-BD, LLC and NAMCOA are inde­pen­dent­ly owned and are not affil­i­at­ed.

Thank you.