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Higher interest rates, oversupply, and rising costs have battered commercial real estate. Will 2025 be different?
- Commercial real estate is expected to rebound modestly in 2025, primarily driven by resilient economic growth and demand, although there are challenges that could restrict growth such as rising inflation and higher long-term interest rates. The majority of commercial real estate debt is tied up with long-term interest rates benchmarked against the 10-year Treasury yield. 60% of outstanding commercial real estate debt is tied to higher long-term interest rates, far higher than previous years, which have emerged as key risks for refinancing deals and sales in the commercial property segment. Industrial warehouse space is set to lead the way, particularly in the US. Online shopping, which has increased during the pandemic, is expected to absorb 30% of US consumer spending, driving the growth of industrial space.
- Long-term interest rates are expected to remain high in 2025, which will continue to complicate commercial real estate sales and refinancing deals.
- Observing some of President-elect Donald Trump's campaign promises to drive down short term interest rates, enact tariffs on foreign goods, and deport undocumented immigrants from the labor supply could spark inflation, intensifying problems in commercial real estate financing.
- The industry has been optimistic on the incoming administration, particularly for its investment in infrastructure and tax policies, as well as the exploitation of opportunity zones, which the industry hopes will get a boost.
- Industrial warehouse space is set to lead the charge in the early parts of 2025, as new supply dwindles and demand picks back up. The online shopping boom is expected to drive the growth of this sector.
- Resilient and steady economic growth is propelling demand for commercial space, with some developers optimistic about high-end office projects, as tenants continue to flock to this sort of space. This positive trend outlook is likely to continue for the sector.
- An estimated $570bn of commercial real estate loans will mature in 2025 and there remains an indication that oversupply, rising costs, and higher interest rates will continue to damage the commercial real estate industry in general.
- Real estate companies such as CBRE predict a 7.5% increase in investment sales activity for 2025, primarily due to investors and buyers discovering asset pricing, giving rise to a potential market recovery.
- Industrial warehouse space boomed during the pandemic driven by American shoppers migrating online, boosting the need for logistics spaces and onshore storage for a disrupted global supply chain. A record total of roughly one billion square feet of industrial space was absorbed in 2022 and 2023.
- The first half of 2024 was the nadir of the industrial space dip, whereby the election and higher interest rate uncertainty caused businesses to hold off supply expansion. Experts expect a resurgent 2025 with the sectors of interest improving and likely to lead investor interest being multifamily and industrial.
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