After several years of tightening monetary policy, the Federal Reserve ended 2024 at 4.5% and has kept interest rates unchanged for the second consecutive time so far in 2025. Going forward, although the Fed is expected to continue lowering rates, there’s still uncertainty about how the new administration’s policies will shape the market in 2025. The full details remain unclear, but commercial real estate is set for improvements in the coming year.
At the beginning of 2025, office demand showed signs of recovery but wasn’t strong enough to push net absorption into positive territory, leaving vacancy rates near record highs. The retail market stayed tight, constrained by a lack of new supply, while industrial vacancies continued to climb, contributing to a deceleration in rent growth. At the same time, the multifamily sector remained robust, with demand nearing the peak levels last seen in 2021.
Office Properties
At the beginning of 2025, office absorption remained negative; however, market conditions improved significantly over the past year. Office move-outs dropped threefold in the year ending February 2025, totaling -20.5 million sq. ft., as more companies reinforced return-to-office policies. Continued negative absorption and new construction deliveries—totaling 24.5 million sq. ft—pushed the national vacancy rate up to 14.1%. Rent growth, however, posted a modest gain of 0.2%, bringing the annual rate to 1.1%. Improvements were seen across all office classes, with reduced outflows compared to the prior year. Among major metros, Boston and Washington, DC recorded the largest losses, while San Francisco’s outflows slowed significantly. New York and Sacramento each posted over 1 million square feet of positive absorption, with New York showing a notable rebound from a year-over-year decline of 8.4 million square feet to a gain of 3.4 million square feet.
Multifamily Properties
The multifamily sector showed signs of stabilization in early 2025, driven by strong rental demand and a 46% increase in net absorption, reaching nearly 551,000 units. While new supply still outpaced demand by 18%, the gap narrowed, maintaining steady vacancy rates at 8%. Rent growth remained modest at 1.1%, reflecting market balance. Construction slowed, with units under development down 33% year-over-year. High-demand metros, such as Dallas-Fort Worth, New York, and Atlanta, absorbed over 20,000 units each. Meanwhile, rents fell in oversupplied Sun Belt cities like Austin and Denver but grew sharply in Providence and Rochester.
Retail Properties
With limited space availability, the retail sector continues to post the lowest vacancy rate among commercial property types, despite closures and bankruptcies. While net absorption fell 77% year-over-year, rents still rose by 1.9%, and the vacancy rate increased only 0.1 percentage points, marking the first uptick in nine quarters. General retail led the way in positive absorption and had the lowest vacancy rate at 2.6%. Regionally, Salt Lake City and Norfolk saw rents rise over 6%, while Los Angeles recorded the largest space losses.
Industrial Properties
After several years of record-breaking growth, the industrial sector continued to slow through early 2025 as new supply outpaced demand. Net absorption dropped 42% year-over-year to 114 million square feet, while vacancies rose to 7.0%. Rent growth softened further to 2.0%, though it remains higher than in other sectors. Logistics led absorption, while Flex space saw losses. While the market isn’t as tight as its peak, it remains one of the most fundamentally sound asset classes in commercial real estate.
Hotel Properties
As 2025 begins, the hospitality sector remains steady. Hotel occupancy sits at 63%, still 2.8% below pre-pandemic levels, largely due to the continued influence of remote work. However, both average daily rates and revenue per available room have surpassed pre-pandemic benchmarks, signaling a rebound in profitability.
