We’re four years removed from the global pandemic that devastated some commercial real estate sectors like entertainment venues, offices, retail establishments, and restaurants. Other sectors, such as multifamily and industrial (data centers, manufacturing facilities, trucking terminals, warehouses), fared well then and have continued to thrive. As we look ahead to 2025, many CRE professionals say they’re cautiously optimistic about the upcoming year.
The industry appears poised for strategic recalibration, with emerging market conditions suggesting a nuanced path forward. Successful navigation will require adaptability, innovative approaches to space design, and a keen understanding of evolving market demands.
The economy
The CRE industry has weathered significant economic challenges like concerns about inflation and interest rates potentially destabilizing the U.S. economic landscape. Recent indicators suggest a “soft landing” as the Federal Reserve continues to cut interest rates while successfully managing economic pressures.
Will the economy forge full steam ahead next year? It’s hard to say. The Conference Board anticipates a 1.7% expansion of the U.S. economy in 2025 — a slight reduction from 2024’s 2.7% estimate. Factors contributing to this conservative outlook include:
- Persistent inflationary pressure
- Geopolitical tensions in global conflict zones
- Ongoing uncertainty about monetary policy adjustments
Despite a measured growth forecast, CRE professionals remain primarily positive. A Deloitte & Touche LLP survey of 880 CRE professionals found that 88% anticipate revenue increases in 2025, with about 60% expecting growth of 5% or more. These predictions are quite a shift from previous years.
Interest rates
The Fed cut interest rates by 50 basis points in September and 25 basis points in November, with plans for another 25 basis points cut in December — the first rate cuts since 2020. However, the duration and depth of future cuts remain uncertain. Central bank actions influence interbank lending rates, which don’t directly translate to corporate lending costs, so the recent lower rates haven’t significantly affected long-term rates paid by CRE professionals.
Various economic factors influence interest rates for CRE financing, including:
- Overall economic projections
- Inflation expectations
- Capital market dynamics
- Investment capital allocation
While a robust stock market continues to attract significant capital (and impact debt), financing costs remain higher than CRE professionals like. Economics experts anticipate that the “higher for longer” interest rate scenario will remain into 2025. CRE professionals should proceed cautiously when developing their investing and financing plans and not assume a direct correlation between Fed rate cuts and borrowing expenses.
On the bright side, while capital costs remain elevated, rates have stabilized and will hopefully continue heading in the right direction. Experts don’t anticipate dramatic rate fluctuations; CRE stakeholders can focus on strategic planning that accounts for the current measured, albeit challenging, financial environment.
Continuing trends in 2025
Some of the other ongoing issues that the Counselors of Real Estate identified as influencing the CRE industry in 2025 include:
- AI innovations: Artificial intelligence is transforming the real estate industry, with professionals increasingly exploring technological integration. While AI shows promise for optimizing operational processes, the sector faces other challenges like data fragmentation, data security, and complex location-specific variables.
The technology’s advancement may drive substantial infrastructure developments, particularly in data center construction, as computational demands for sophisticated AI algorithms grow. The CRE industry stands at a critical junction of innovation and implementation. - High financing costs: Despite initial rate cuts, the real estate market remains cautious. Property owners are reluctant to sell, and potential buyers hesitate to commit to high prices and uncertain market conditions. CRE experts anticipate a conservative approach to transactions focusing on high-yield opportunities. They expect the market to remain subdued in 2025 and don’t expect a more significant recovery and active deal-making for at least two more years.
- Housing affordability: The housing market continues to struggle with a critical shortage of about 4.4 million units. With demand far outpacing supply — and construction efforts unevenly distributed across metropolitan areas — multifamily rents have surged 45% over the past 15 years.
Over 50% of renters are feeling the pinch and considered “cost-burdened” as they spend 30% or more of their income on housing. Experts predict affordability pressures will keep growing in 2025, driven by declining multifamily construction and increasing demand from younger renters. To address these systemic challenges, the market urgently needs expanded new home development and the preservation/conservation of existing affordable units. - Insurance costs: In 2003, natural disasters resulted in $380 billion in economic damages; insurance covered just 31% of total losses. Escalating risks from extreme weather, inflation, and rising property values are driving significant changes in insurance strategies.
Some property sectors, including hospitality, residential, and senior living, face heightened vulnerabilities. The insurance industry is fundamentally transforming, with property owners increasingly prioritizing comprehensive risk management over traditional coverage models. Emerging approaches focus on strategic coverage optimization and innovative risk mitigation techniques to slow and control mounting expenses. - Loan maturity deadlines: Approximately $1.8 trillion in CRE loans will reach maturity in 2026. Lending institutions are extending loan terms in anticipation of market stabilization. But, regulatory pressures and limited financial resources may render this strategy unsustainable.
The ongoing loan situation could disrupt property market dynamics, impacting competition and stability across various real estate sectors. Financial institutions and property owners have quite a complex loan management landscape to navigate in 2025. - Office conversions: The report projects that office vacancy rates will approach 20% by late 2024, creating significant challenges for municipal financial structures. This dramatic shift in workspace utilization is prompting developers to explore alternative property uses like residential conversions. While these transformations offer potential urban revitalization opportunities, they involve complex, costly processes.
The ongoing transformation reflects a broader evolution in workplace dynamics, with cities experiencing a fundamental reimagining of commercial space use. Innovative adaptive reuse strategies have emerged as possible solutions to address the changing urban real estate landscape, potentially reshaping city centers through strategic property repurposing. - Sustainability: Escalating natural disasters have caused billions of dollars in property damages, highlighting critical vulnerabilities in current building design and infrastructure. While European regulations have implemented comprehensive sustainability standards, U.S. approaches remain inconsistently applied across jurisdictions.
Industry experts emphasize the growing imperative to develop and champion climate-resilient building strategies. Extreme weather events are driving sustainable economic losses and dramatically increasing insurance costs, underscoring the need for proactive environmental adaptation in real estate development and management.
Where to invest in 2025
CRE investors do have investment options for 2025, including the following five classes.
- Data centers: Several factors, including 5G technology, AI, blockchain, cloud computing, e-commerce, and the Internet of Things (IoT), are propelling the digital economy’s rapid growth. These advancements — plus emerging technologies — rely heavily on digital infrastructure real estate.
Digital infrastructure encompasses call and data centers, cell phone towers, microchip manufacturing facilities, and server farms, among others. The current demand for this industrial real estate significantly outpaces supply, a trend likely to persist in 2025 and beyond. - Hospitality: This industry will build on its recent momentum, offering a promising opportunity for CRE investors in hotels, resorts, and short-term rentals. The strong economy, fueled by a robust stock and job market, is driving increased leisure and travel spending. Consumers have more disposable income for trips and vacations. A caveat: the hospitality sector is cyclical and more susceptible to fluctuations than other CRE sectors.
- Industrial: The surge in e-commerce and the digital economy has fueled a parallel increase in demand for industrial properties like logistics centers, manufacturing plants, storage units, trucking terminals, and warehouses. Consumer expectations for rapid goods delivery, from groceries to electronics, have driven the need for more localized industrial real estate. Companies are expanding their footprint to meet this growing demand, and savvy investors and developers are capitalizing on the trend, which shows no sign of slowing in 2025.
- Multifamily residential: Demand for affordable, safe apartments remains high and will continue through 2025, especially in densely-populated East and West Coast population centers and the Southeast. Factors contributing to this demand include a shortage of affordable housing, lower rates of homeownership among younger generations, and ongoing immigration. These trends support the multifamily sector and its anticipated growth.
- Senior housing and assisted living: The aging U.S. population, particularly the Baby Boomers, is a significant driver for senior housing investment in 2025. Healthcare advances have extended lifespans, increasing demand for senior living options. This demand, paired with a shortage of affordable, available senior housing, nursing homes, and assisted living facilities nationwide, creates a compelling investment opportunity. While high healthcare costs and stringent regulations introduce complexities within the industry, successful operators can capitalize on the robust demand and generate respectable profits.
Are you a commercial real estate investor — or looking for a specific property to meet your company’s needs? We invite you to talk to the professionals at CREA United, an organization of CRE professionals from 92 firms representing all disciplines within the CRE industry, from brokers to subcontractors, financial services to security systems, interior designers to architects, movers to IT, and more.
