Company: MMI
Filing Date: 2025-02-27
Form Type: 10-K
Source: 0001578732-25-000015
Chunk: 82

Company: Marcus & Millichap, Inc.
Filing Date: 2025-02-27
Form: 10-K
Item: Item 7
Chunk 82
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 in commercial real estate construction this year. New industrial and multifamily completions are trending lower entering 2025, but the reduction in construction activity may be accelerated by the diversion of workers and construction materials to areas impacted by severe natural disasters. In addition, tariff-driven construction material cost increases and reduced construction labor availability could impact commercial real estate deliveries. The combination of strengthening space demand and reduced construction suggests key commercial real estate fundamentals could improve steadily in the coming year, supporting investment activity.

Capital Markets

Credit and liquidity issues in the financial markets have a direct impact on the flow of capital to the commercial real estate market. Real estate purchases are often financed with debt, and as a result, credit and liquidity impact transaction activity and prices. Movements of interest rates in one direction, whether increasing or decreasing, could adversely or positively affect the operations and income potential of commercial real estate properties, as well as lender and equity underwriting for real estate investments. These changes directly influence investor demand for commercial real estate investments and what they are willing to pay. Furthermore, the use of debt or loan-to-value ratios can shift along with 

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lender confidence and underwriting standards. At times of heightened uncertainty or liquidity issues, loan-to-values decline, requiring buyers to provide more equity and take more risk to close deals.

The capital markets have been at the heart of the commercial real estate transaction slowdown over the last two years. The combination of sustained higher interest rates with tighter lender underwriting, reduced loan-to-value standards and a broad-based reduction in the volume of available debt capital have restrained market liquidity. This has forced investors to recalibrate their underwriting. This widened the buyer/seller expectation gap and reduced trading throughout 2023 and 2024.

The 100-basis point rate reduction by the Federal Reserve in the latter part of 2024 initially improved investor sentiment, but the increase of the 10-year treasury rate following the rate cut negatively impacted borrowing rates. However, lending liquidity is gradually improving, and the competition to lend capital is rising, which is causing lenders to reduce their spreads over the underlying rates, in turn putting modest downward pressure on borrowing rates. At the same time, the slowing pace of new supply additions in conjunction with strengthening space demand suggests that asset performance could improve over the coming years. The prospect of falling vacancy rates and increasing rent growth have begun to encourage investors to recalibrate their underwriting on acquisition targets, helping to bridge the buyer/seller expectation gap. Despite still-high interest rates, improving fundamentals may be sufficient to offset the elevated