Commercial Real Estate 2025 Outlook: What Investors Should Know

Outlooks for 2025 in commercial real estate (CRE) often highlight "cautious optimism" regarding market expectations and strategies. The industry shows signs of upward momentum, and some sectors are nearing pre-pandemic conditions. Still, uncertainty lingers due to key factors.??

What’s Ahead for Commercial Real Estate in 2025??

As we head into 2025, commercial real estate is poised for a dynamic year, with a range of opportunities and challenges across key sectors. The market is showing signs of resilience, but it’s clear that each sector will face its own unique set of conditions.??

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1. Office real estate revival: The office real estate sector, previously considered weak due to the pandemic, is showing signs of significant growth. CBRE forecasts a drop in overall vacancy rates, driven by increased leasing activity in major office markets. At the end of 2024, the tenant pipeline was up 10% year-over-year in the 11 largest U.S. markets, and new supply is limited. Construction of new class A buildings has decreased by 74% since 2020, with total annual completions at the lowest since 2013. That number is projected to continue to fall in 2025.?

2. Retail real estate resurgence: Retail real estate's attractiveness varies by market. E-commerce has become the first choice for many, especially during the pandemic, leading to fewer buyers populating retail buildings. Despite this, forecasts indicate a positive outlook for retail. CBRE reports that, of all commercial real estate sectors, retail had the lowest vacancy rate at the start of 2025. Demand is expected to be strong in Sun Belt cities and suburban areas. Additionally, high-traffic metropolitan locations will likely continue to see high demand, with high-end retail and grocery-anchored neighborhood shopping centers as key drivers. Consumer spending is expected to increase, led by millennials and Gen Zers, who prefer dining out and shopping.?

3. Industrial real estate resilience: This sector remains resilient and is expected to continue its positive trajectory in 2025. Colliers’ analysis suggests a realignment in the sector by mid-2025, addressing the imbalance caused by a 250-basis-point rise in vacancy rates since 2023 and the completion of numerous new industrial properties. Although demand slowed in 2024—falling from 100 million square feet per quarter between 2020 and 2022 to 38 million square feet per quarter—leasing rates are expected to increase by 3% to 6% in 2025. However, this represents a slow to near typical growth, after lease rate growth peaked at 20% in 2023.?

4. Multifamily real estate stabilization: Multifamily real estate continues to be a solid performer, but growth will slow in 2025. Oversupply in many markets, coupled with high vacancy rates, is dampening rapid growth. Freddie Mac projects a rise in vacancies to 6.2% and a modest rent increase of just 2.2%, following a 2000-2023 average of 2.8%. Investors are advised to target markets with less supply, excluding the Sun Belt and Mountain West, where rental demand remains strong. The oversupply of multifamily units is expected to stabilize by 2026.?

5. High demand for data centers: The demand for data centers is surging due to the growth of artificial intelligence, cloud computing, and digital services. The main challenges are constructing buildings to meet these needs and selecting sites without power constraints. According to CBRE, the vacancy rate in major markets is at a record low of 2.8%, with pre-leasing rates potentially reaching 90% in 2025. Rental prices for data centers may surpass levels seen between 2011 and 2012. The new standard for data center projects will require over 100 megawatts (MW) of power.?

3 Factors That Will Challenge CRE in 2025 and Beyond?

As the market evolves, experts weigh in on the top challenges commercial real estate investors must watch out for. Here are the three factors that almost all outlooks and forecasts mention:??

1. Expected Changes in Policies Under Trump’s Administration??

Tax cuts, higher tariffs, and stricter immigration policies under Trump’s administration could pose challenges for the CRE industry. According to Oxford Economics, increased tariffs may impact the retail and industrial sectors by increasing costs for businesses and consumers alike. Additionally, a decline in immigrant labor could strain the hospitality and construction industries, potentially leading to labor shortages and rising wages.?

However, Cushman & Wakefield highlights Trump’s focus on fiscal stimulus and deregulation, which could inject more capital into the market. This influx of investment may drive greater demand for commercial properties, including retail, office, and industrial spaces.?

2. Interest Rates and Inflation Remain Uncertain??

The Federal Reserve announced Wednesday that it unanimously voted to keep the federal funds rate at 4.25% to 4.5%, while the 10-year Treasury yield is expected to hover around 4%. However, market uncertainty persists. Experts caution that rates could rise in response to evolving economic conditions. Analysts suggest that the shifting policy positions under Trump’s administration could drive inflation higher and expand the budget deficit, both of which may put upward pressure on interest rates.?

3. The Impact of Climate Change on Commercial Real Estate?

Extreme weather events, intensified by climate change, are becoming a growing concern for CRE, particularly in disaster-prone markets. In 2025 and beyond, CRE stakeholders must account for the increasing risks posed by natural disasters. Last year, Hurricanes Debby, Helene, and Milton wreaked havoc in Florida, with Milton ranking among the strongest hurricanes ever recorded in the Atlantic basin due to its wind speed, pressure, and rapid intensification. Meanwhile, recent wildfires in Southern California are deemed among the costliest in the history, with estimated damages ranging from $250 to $275 billion. Wildfires in Los Angeles County have destroyed more than 15,000 structures and forced the evacuation of 150,000 residents.?

As climate-related disasters become more frequent and severe, property valuations and insurance premiums have surged. Since 2017, CRE insurance costs have risen by an average of 7.6% annually. Additionally, environmental regulations have tightened across various markets, requiring properties to meet higher sustainability and disaster-resilience standards.?

Conclusion?

Although rapid growth in commercial real estate isn’t widely anticipated for 2025, it's reassuring to see certain sectors making solid progress. This makes it the ideal time to craft strategic plans and stay ahead of opportunities by conducting precise deal and market analyses.?