Although the first half of 2025 has proven rockier and more uncertain than many in commercial real estate were initially predicting, optimism for the second half is pervasive.
Industry surveys and economist reports suggest while the second half of 2025 will still have a fair amount of choppiness to navigate, investors may be more willing or able to move forward on deals amid another “new normal.”
“I think part of it is how to deal with uncertainty,” said Harry Klaff, principal and U.S. president at Avison Young.
Volatile tariff policy and trade disputes have been headliner topics for commercial real estate and the economy more broadly in the first half of 2025. While questions around where tariff policy ultimately will end up continue, groups that own or occupy real estate are gaining more certainty and confidence in moving forward on decisions.
Klaff pointed specifically to the office market, where renewed return-to-office mandates by companies this year have brought activity back to many office towers and bolstered leasing interest.
Kastle Systems LLC, which has tracked office-building foot traffic in major cities since the Covid-19 pandemic, found physical occupancy of offices the week of June 11 averaged 53.7% across 10 major cities. It averaged 78% when looking strictly at Class A-plus buildings, which have proven most popular with companies today.
But even if more companies are back in offices more regularly and feel more confident about making space decisions, there are variables that remain unknown. It’s unclear, for example, how much it might cost to build out a new office, given the shifting costs of materials and labor, Klaff said.
“We are seeing landlords, especially in [Class] A trophy, are limiting their tenant-improvement allowances,” he said. “To build out space you really want, it’s going to cost more to get there. Will that have an impact on tenant demand?”
A survey of Avison Young real estate professionals found 51% of respondents have a more positive outlook for the U.S. commercial real estate landscape in the second half of 2025 compared to their sentiment at the end of 2024. Forty-four percent indicated they felt the same, while 5% felt less optimistic.
But optimism isn’t distributed equally across property types or sectors. While surveyed Avison Young professionals indicated they felt there was medium interest for office-leasing velocity and investor interest in the second half of 2025, leasing velocity for industrial and health care erred on the higher end, while investor interest registered highest for data centers and multifamily.
Tim Bodner, U.S. real estate deals leader at PricewaterhouseCoopers, said while transactions in some of the traditional commercial real estate asset classes — office, multifamily, retail and industrial — have been softer in the first months of 2025, alternative asset classes have proven popular.
Although data centers have occupied much of the conversation, and have arguably become a mainstream asset class in their own right, other sectors like cold storage, senior and student housing, and even wellness real estate are also seeing significant investment, according to Bodner. Major real estate investment trusts like Kansas City, Missouri-based EPR Properties (NYSE: EPR) are among the groups deploying significant capital into wellness-related properties.
“In an environment where the cost of capital is higher, the hurdle rates are higher, and you have to have growth to generate returns to make sense for investors,” he said. “All of those [alternative asset classes] have really strong enduring tailwinds, whether it’s digitization, demographics, deglobalization.”
Klaff said Avison Young is projecting the data-center market will nearly quadruple by 2030. He added the biggest challenge for data centers will continue to be power, and the cost of land for data centers will carry much more of a premium — not to mention sites ideal for data-center development are frequently pursued by manufacturing facilities, too.
Pricing adjustments in certain asset types is spurring some deals, including office-to-residential conversions. Despite large blocks of space left vacant by tenants in the flight-to-quality narrative, many so-called obsolete office buildings are still sitting empty, even as local officials try to incentivize conversions and other projects to help bring people and tax revenue back to downtowns.
That’s starting to change. CBRE Group Inc. (NYSE: CBRE) recently found more office space nationally will be removed from the market than added this year, the first time that’s happened since at least 2018. By the end of 2025, 23.3 million square feet of office space in major markets tracked by CBRE is slated for demolition or conversion, while developers are expected to finish construction on 12.7 million square feet of office space in those same markets this year.
While conversions won’t erase all of the office market’s challenges, some owners have decided their buildings won’t recover the way they initially expected, so it’s perhaps better to cut their losses, Bodner said, and sell — even at a steep discount. Those discounts can then make conversions by a new owner more palatable.
Klaff echoed that sentiment, saying there’s a high level of investor interest in buying offices, but there’s still a discrepancy in bid and ask pricing — although some properties are starting to trade at value pricing.
“I think it’s a realization of what it’s going to take to be able to make the economics work on a building,” he said. “It’s more expensive. Consequently, the pricing needs to ensure that that can be financeable.”
Uncertainty makes outlook tough to gauge
Despite predictions for a more robust second half of 2025, uncertainty will remain a major theme for commercial real estate. Many investors are not being forced to put their capital to work, Bodner said, which means they can be patient and wait to see what happens with tariffs and other policies.
The industry also is waiting to see what comes out of the federal budget bill, which currently includes tax credits and provisions that could be leveraged by commercial real estate, including around Opportunity Zones and a proposed increase in the Qualified Business Income deduction.
Once a bill is passed, that would provide “another dimension to the stool” and give real estate groups more certainty, Bodner said.
In its Midpoint 2025 report, Cushman & Wakefield PLC (NYSE: CWK) economists noted the economic situation “remains fluid.” Its base case calls for short-term stagflation for the rest of 2025, given recent hard shifts in economic policy, particularly around tariffs.
The economists also noted the commercial real estate sector at the start of 2025 was gaining momentum, especially in the capital markets, but there’s potential for a pause in that progress in the coming quarters. Still, the economists wrote, the market overall looks stable in its baseline forecast, and the stage is set for “sequentially strong performance” in 2026.
In its assessment of the major property types, Cushman says the office market is improving, industrial’s growth has slowed, and multifamily remains strong and accelerating. Retail was marked as weakening, owing to limited space options, and sales volume was also labeled as weak, but improving.
According to Cushman, at the start of President Donald Trump’s second term, the effective tariff rate was a little less than 3%. That surged to 20.5% on April 2, when a raft of stringent tariffs was announced by the Trump administration, then jumped again to 25.4% when an escalation with China pushed tariffs on goods imported from that country to past 100%.
Since a 90-day pause in the higher tariffs on China was announced in May, the effective tariff rate has receded somewhat, to 14% to 18%, but that’s still substantially higher than it was when Trump returned to the White House. How tariffs impact consumer behavior, business spending, imports, the supply chain and inventories will all have a sizable impact on commercial real estate.
“The commercial real estate sector entered 2025 on relatively solid ground, with certain segments even gaining momentum,” said Rebecca Rockey, deputy chief economist and global head of forecasting at Cushman & Wakefield, in a statement earlier this month. “Even now, amidst the uncertainty, the capital markets are continuing to thaw, capital is plowing back into the property sector, and leasing fundamentals are largely holding up well.”
Source: “Commercial Real Estate Optimism Grows for Second Half of 2025 Despite Rockiness“
