Will There Be a Commercial Real Estate Recovery in 2025?
The U.S. commercial real estate (CRE) sector is exhibiting signs of a gradual recovery after enduring significant challenges in recent years. Factors such as rising interest rates, the shift to remote work, and economic uncertainty have previously suppressed the market. However, recent developments suggest a cautious optimism among investors and industry stakeholders.
Interest Rate Dynamics and Investment Activity
A pivotal factor contributing to the CRE sector’s rebound is the recent trend of central banks reducing interest rates. Lower borrowing costs have historically stimulated investment in real estate by making financing more accessible. While the Fed has not cut rates as aggressively as some expected, they still cut them through the latter portion of 2024, and it remains likely that they will cut rates over the course of 2025. This monetary easing is expected to bolster property values and encourage transaction activity. According to CBRE’s U.S. Real Estate Market Outlook 2025, economic growth coupled with strengthening real estate fundamentals is anticipated to drive a moderate recovery in investment activity throughout the year.
Industry leaders are also expressing optimism. Blackstone, a prominent global investment firm, has significantly increased its investments in the CRE sector, anticipating benefits from the ongoing recovery. In 2024, the firm invested $25 billion in property, with plans for continued large-scale investments. Blackstone’s President, Jon Gray, highlighted the firm’s expectation to capitalize on the sustained recovery in the commercial real estate sector.
Sector-Specific Trends
The recovery trajectory varies across different segments of the CRE market:
- Office Spaces: The office sector continues to face challenges due to the persistence of remote and hybrid work models. High vacancy rates and subdued demand are expected to persist into late 2025. However, there is a notable trend of repurposing underutilized office spaces into residential units, particularly in urban centers like New York City, where 8,310 office units are scheduled to be converted into residential dwellings in 2025, a 59% year-over-year increase. This approach addresses housing shortages and revitalizes obsolete office buildings.
- Industrial Properties: The industrial sector remains robust, driven by the continued growth of e-commerce and the need for efficient logistics. Despite a temporary oversupply in 2024, the sector is poised for a resurgence in 2025 as new supply decreases and demand increases.
- Retail Spaces: The retail sector has undergone a “rightsizing” process, leading to a more balanced market with limited new supply. This adjustment has resulted in healthier fundamentals, with the U.S. retail sector ranking first in total returns across major property types in recent quarters.
Challenges and Considerations
Despite positive indicators, the CRE sector must navigate several ongoing challenges:
- Refinancing Risks: Elevated interest rates, despite recent cuts, continue to pose challenges for refinancing, especially for maturing loans. Stakeholders must remain vigilant in managing these risks to prevent potential defaults.
- Market Dislocation: Certain segments, particularly lower-quality office spaces, face obsolescence due to changing work patterns. Addressing these issues may require innovative approaches, such as repurposing or significant capital improvements.
- Economic Uncertainty: Global economic factors, including geopolitical tensions and potential policy shifts, add layers of uncertainty that could impact the pace and sustainability of the CRE recovery.
Outlook for 2025
Analysts project that 2025 could be a pivotal year for the CRE sector. David Steinbach, Global Chief Investment Officer at Hines, outlines several reasons for optimism, including a favorable “buy” cycle, strong rental demand, and healthy retail fundamentals. Additionally, the anticipated decline in new construction is expected to bring supply and demand into closer alignment, further supporting the recovery.
In conclusion, while the U.S. commercial real estate sector is not yet fully out of the woods, the convergence of lower interest rates, strategic investments, and adaptive market strategies are fostering a cautiously optimistic outlook for 2025. Stakeholders who navigate the remaining challenges with agility and foresight are likely to find substantial opportunities in the evolving landscape.
Franklin Carroll
Franklin Carroll is Kukun's VP of Modelling and Analytics; After finishing his studies at the University of Chicago, he worked at Fannie Mae where he helped build Collateral Underwriter, roll out the Value Verify initiative, and specialized in collateral related and credit related policy.
Published February 10, 2025
