iStock; Rebecca Zisser/BI
The commercial property sector has had a bruising few years as rising interest rates pushed down values, complicated refinancing deals for hundreds of billions of dollars of expiring mortgages, and stymied investment.
In the office market, the situation was even more severe as hundreds of millions of square feet of space across the nation face accelerated obsolescence. Employees have embraced hybrid and remote work as a permanent offshoot of the pandemic, sapping demand for lesser quality space.
In recent months, however, the industry has felt relief from three successive rate cuts by the Federal Reserve that have shaved a percentage point off the fed funds rate — a benchmark for short-term lending rates. More cuts are expected in 2025. Resilient economic growth, meanwhile, has propelled demand for commercial space, including apartments, warehouses, retail stores, and hotel rooms. Some developers have even grown bullish on top-tier office projects as tenants flock to high end space.
In 2025, commercial real estate experts have signaled cautious optimism that the sector's rebound will continue, while also highlighting the challenges that could stymie growth.
Here are three trends for the industry to watch in 2025:
Of the roughly $4.7 trillion of total outstanding commercial real estate debt, about two-thirds is tied to long-term interest rates benchmarked against the 10-year Treasury yield, according to an estimate by the Mortgage Bankers Association. After dipping in the third quarter, long-term interest rates have jumped back up to the mid-4% range, close to where rates were before the Fed began cutting and far higher than where the 10-year was in recent years. The 10-year Treasury rate dipped below half a percentage point in 2020, its lowest level ever.
In 2025, observers expect long-term rates to hold steady, even if the Fed continues to trim short-term rates.
"The 10-year Treasury yield, that's really driven less now by anticipation of what the Fed might do and more by long-term expectations about economic growth and inflation and federal budget deficits," Jamie Woodwell, the MBA's head of commercial real estate research, said.
That could continue to complicate commercial real estate sales and refinancing deals.
The MBA projects that $570 billion of commercial real estate loans will mature in 2025, with banks holding about 38% of the overall inventory of outstanding debt in the sector.
Tomasz Piskorski a professor of real estate at Columbia Business School, said that 14% of commercial loans overall are tied to distressed assets that are now worth less than their debt and that 43% of commercial real estate loans "may face significant cash flow and refinancing issues." He has warned there could be tens of billions of dollars of potential losses for the banking sector and other lenders.
The real estate services giant CBRE, meanwhile, has forecast a modest 7.5% increase in investment sales activity, predicting about $410 billion of transactions in 2025. More sales would help buyers and sellers discover asset pricing and is considered a positive sign for a market recovery.
Richard Barkham, CBRE's chief economic economist, warned of lingering higher long-term interest rates that could dampen the rebound.
"Over the next four or five years we're likely to get upside shocks in inflation," Barkham said. "That points to an era of interest rates higher for longer."
Some of President-elect Donald Trump's campaign promises to enact tariffs on foreign goods, pressure the Fed for lower short term interest rates, and deport undocumented immigrants from the labor supply could spur inflation, reigniting problems in the commercial real estate financing market.
Nonetheless, the industry has been largely positive on the incoming administration.
Investors "expect better tax issues, they expect less regulation, they expect some real estate specific stuff like opportunity zones will get a bit of a boost," said Jim Costello, the co-head of real assets research at the data firm MSCI, referencing the opportunity zone program from President Trump's first term in office. Opportunity zones allowed real estate investors the chance to defer and avoid capital gains taxes if they reinvested investment proceeds in property projects in designated zones around the country.
President Trump has also sought to hire real estate executives in his administration, meaning that top officials could have an familiarity with the real estate business and its priorities. Howard Lutnick, a Wall Street billionaire who is also chairman of the large commercial real estate services firm Newmark Group, for instance, has been picked by Trump to lead the Commerce Department.
Industrial warehouse space boomed during the pandemic as American shoppers migrated online, boosting the need for logistics spaces that served e-commerce and also to onshore storage for a disrupted global supply chain.
A record total of roughly a billion square feet of industrial space was absorbed on balance by occupiers in 2022 and 2023, according to Craig Meyer, president of JLL's industrial leasing group in the Americas. That activity was enough to fill a vast pipeline of new space that was being added to the market. In 2022 and 2023, 1.1 billion square feet of new industrial space was delivered, according to JLL — also a record.
In 2024, however, demand could no longer keep pace with surging supply – stalling rental growth and pushing up vacancy.
About 375 million square feet of new space was added to the industrial market in 2024 – the third highest year on record after 2022 and 2023. But only about 111.3 million square feet of space has been absorbed on net, the lowest year of absorption in more than a decade. Vacancy has jumped to 6.8% from 4.9% a year ago. In the second quarter of 2022, vacancy had fallen as low as 3.3%.
Meyer said that the first half of 2024 was the nadir of the dip and expects a resurgent 2025.
"We had a contentious election coming up," Meyer said. "People were uncertain where interest rates were going."
In 2025, Meyer and other experts, including Barkham, CBRE's economist, see a strengthening industrial market as new supply dwindles and demand picks back up.
"The sectors that are big and improving and likely to lead investor interest are multifamily and industrial," Barkham said.
Some 268.9 million square feet of industrial space is presently under construction, according to JLL, the smallest pipeline since 2019. E-commerce, one of the biggest drivers of warehouse demand, continues to grow. According to CBRE, online sales are expected to absorb 30% of consumer spending by the end of the decade, up from 23% today, adding tailwinds to the segment.
