We’ve arrived in 2025 — and there’s a lot to keep an eye on this year in both commercial and residential real estate.
2024 brought a year of mostly modest changes for owners, operators, developers and users of real estate, particularly in the latter half of the year, as the Federal Reserve began issuing interest-rate cuts. Those moves had been long awaited by both commercial and residential real estate industry groups, with the high cost of debt having iced a lot of deal activity in 2023 and 2024.
A thawing is widely expected to occur in 2025, as dry powder sitting on the sidelines readies to deploy capital into buying, selling and building real estate this year. How much of a thaw will occur is hard to predict, though. A number of variables are poised to impact how real estate decision-makers assess their investments and risk appetite this year.
The office market continues to be the biggest storyline when considering the major asset classes in CRE. Leasing activity remains sluggish, although much depends on metro area: Absorption began to turn positive in a few cities toward the end of 2024, and some places even saw their vacancy rates inch downward. Still, a mountain of debt backed by office properties that’ve seen big drops in value will continue to be a headache for office owners and lenders — in 2025 and beyond.
As it has since the early days of the Covid-19 pandemic, the national housing market will continue to face affordability challenges in 2025. While there was an uptick in inventory last year — a key metric in a supply-starved market — median home prices continued to inch up for most of the year, although they ended down 1.8% in December 2024 from the year prior, at $402,502. Mortgage rates have sidelined a lot of buyers, a trend that will continue into 2025.
I don’t claim to have a crystal ball, but after speaking with several industry folks in the past few weeks about what’s on the horizon for real estate in 2025, here are five predictions about what’s coming this year.
Prediction 1: Trump’s policies will impact CRE decision-making
What’s tough to pinpoint, though, is whether President-elect Donald Trump’s expected policy changes will yield overall positive or negative impacts for the industry.
Tax policy and deregulation have been touted by many in business (real estate and otherwise) as positive harbingers with a Trump White House. But threats by Trump to impose significant tariffs on goods imported from places like China, Mexico and Canada could prove inflationary for the U.S. economy. After the economy experienced white-hot inflation in the wake of the pandemic, inflation in 2023 and 2024 tapered off, which prompted the Fed to issue three rate cuts late last year. Whether that will continue is a big question mark.
Immigration policy is also expected to have an impact — likely negative — on both residential and commercial real estate, as so much of the workforce in both industries (namely construction) consists of immigrant workers. If mass deportations occur, as Trump promised during his campaign, the labor shortage in the construction trades will worsen.
Most economists say it’s tough to know with certainty what a second Trump term will mean for real estate. Trump re-enters the White House with a vastly different U.S. economy than he faced in his first term.
Prediction 2: Office will see some green shoots, but they won’t erase the most pressing challenges facing the market
Brokers I spoke with toward the end of 2024 seemed more optimistic than usual about the types of office requirements crossing their desks — activity they say hasn’t been seen since pre-pandemic days, in some instances.
Leaders of some major companies, including Amazon.com Inc., have issued more stringent return-to-office mandates this year. That, logically, could translate into those companies needing more office space.
But even if there is an uptick in RTO, stabilizing vacancy, more robust leasing and net absorption turning positive in more cities, the office sector still faces a mountain of challenges. Older buildings that either don’t offer the amenities companies today require or haven’t been invested in will continue to see an exodus and their values erode. Even towers considered somewhat middle-of-the-road in terms of quality, location and offerings are likely to struggle, although a dearth of top-tier space thanks to a lack of recent new construction may benefit buildings that are a tier below the top towers.
There’s also a lot of office debt, a growing share of which is considered distressed. In December, the office loan-delinquency rate among commercial mortgage-backed securities debt rose to 11.01%, an all-time high recorded by Trepp. It’s also the highest rate among the major property types.
Prediction 3: Housing will face the same challenges it’s had since the pandemic
Housing affordability has emerged as a signature issue in just about every corner of the country. It’s a challenge no longer limited to big coastal cities like New York and San Francisco. Even once-affordable Sun Belt and Midwestern markets are seeing home prices surge.
To be sure, prices aren’t skyrocketing like they did a few years ago. But while the rate of growth has tapered off, and even declined in some places, the impact of 50% home-price growth in less than five years can’t be denied. On top of that, mortgage rates that jumped from 2% and 3% early in the pandemic to more than 7% in 2024 have made homeownership out of reach for many.
The 30-year fixed mortgage rate was 6.62% the first week of last year before climbing gradually to a 2024 peak of 7.22% in May. Rates subsequently declined, to 6.08% in late September, before climbing again to reach 6.85% the last week of the year.
Housing economists predict there will be more listings in the new year — along with more newly built homes, as builders ramp up their pipelines to meet demand — but affordability will still make it difficult for households to make the jump from renting to homeownership.
Prediction 4: Data centers will continue to be a source of growth — and contention
Data centers continued to dominate in 2024 in the wake of growing digital infrastructure needs, especially with the advent of artificial intelligence. And more places are seeing data-center development — in years past, growth was limited to core markets like Northern Virginia and Silicon Valley.
The average vacancy rate among primary U.S. data center markets in 2024 hit a record low of 2.8%, according to CBRE Group Inc. (NYSE: CBRE). The firm is forecasting the average preleasing rate for data centers to rise to 90% or more in 2025, and rental rates to challenge record highs recorded in 2011 and 2012.
This boom and demand make data centers one of the top property types to watch in 2025.
But data centers, perhaps more so than other types of real estate development, come with a lot of needs, challenges and controversy. While they are big investments and taxpayers, they don’t usually include a lot of permanent jobs. They also have significant power and water requirements, which have drawn the ire of environmental advocates and communities that are seeing an influx of data-center development.
The proliferation of data centers has resulted in innovation, including ways to more sustainably power these facilities. But this sector’s growth is likely to be a source of tension for the foreseeable future.
Prediction 5: It’s a time of resetting and rebalancing for many CRE sectors
In particular, multifamily and industrial real estate saw record demand and pricing in the early years of the pandemic. That demand, which started to taper off in late 2022 and 2023, subsequently created a glut of inventory in 2024.
That glut will persist for both rental housing and warehouses in 2025, but because there were fewer starts in both sectors last year, supply and demand will begin to rebalance.
Meanwhile, retail real estate has seen little new construction in years even predating the pandemic. That has led to tight vacancy for prime space in many markets.
Last year saw 60% more apartments under construction than what was typical in the 2010s, although last year also saw the fewest number of starts since early 2013, according to RealPage Inc. Because of that robust pipeline, 2025 is expected to be favorable for multifamily renters, as the market continues to absorb a lot of new units. But the period of lofty concessions and rent cuts observed in 2024 may start to wane in some places.
Debt, meanwhile, will be a little easier to access than it has been, which will help unlock transaction activity — especially in the most stable real estate sectors like apartments and warehouses.
