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After years of higher interest rates and speculation of a reckoning in the commercial real estate market, the sector may finally regain more momentum in 2025 — albeit at a slower pace than some had hoped for earlier this year.
“2025 is a turning point for commercial real estate investment,” Marcus & Millichap CEO Hessam Nadji told me. “The market is beginning to come to terms with the fact that we're not going back to the lows of the previous cycle.”
He’s optimistic across all major commercial real estate property types thanks to job growth, steady consumption, and low unemployment.
“CRE supply/demand balance is the best it's been in years as construction is limited in most segments,” Nadji added.
It’s important to note that much of the weakness within the commercial real estate sector has been concentrated within the office sub-sector. Data compiled by SMBC found that office values have fallen off a cliff since the start of the pandemic, declining a staggering 41% from 2020.
But the sector’s performance is starting to stabilize. Recent analysis from Bank of America’s Alan Todd found that rents have plateaued from a year ago and vacancy rates are declining.
Though the Federal Reserve recently indicated two rate cuts next year instead of the previously forecasted four, lower rates will still help bring a long-awaited rebound.
The benefits will reverberate beyond office space across the larger CRE sector as lower rates alleviate refinancing risks and boost capital activity.
“There's a lot of capital that has been raised and is ready to be deployed, and a lot of the fundamentals underlying most property types are still very strong,” PWC’s Andrew Alperstein told me.
And the CRE market is already showing signs of recovery amid increased optimism following two years of declining property values and sluggish transaction and lending activity. PWC’s Emerging Trends survey found that nearly two-thirds of respondents expect their firm’s profit to be “good” or “excellent” in 2025, compared to just 41% a year ago.
Experts tell me two areas of strength within the commercial real estate sector for the new year are data centers and retail.
“Data centers are the talk of the town. There are a lot of tailwinds and positive momentum around data centers, particularly with the generative AI focus across so many facets of the economy,” Alperstein explained. “We're expecting really strong continued rent growth in the data center space.”
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And retail is the other area positioned to outperform within CRE, according to Nadji, who expects record-low vacancy rates and “moderate” revenue growth.