Thrive in 2025
We wade through market reports and synopsize key real estate trends in 2025
In his magnum opus, The Man Who Knew,?Sebastian Mallaby paints Alan Greenspan, “Mr Big Stuff”, the 13th chairman of the Federal Reserve (1987–2006), as a data-obsessed forecaster. Yet, even though Bob Woodward branded Greenspan the Maestro?in his eponymous book, quantitate data was only part of the tableau. As Greenspan himself famously said, “If I turn out to be particularly clear, you've probably misunderstood what I've said.”?
During Greenspan’s tenure as Fed Chairman, CNBC began the “briefcase indicator”, analysing the thickness of Greenspan’s briefcase he carried into the Federal Open Market Committee meetings. The briefcase contained data released by government statistical agencies. If the briefcase was thin, the media surmised that there would not be a change in policy, and if the briefcase was thick, the conjecture was that a change in monetary policy was imminent. Today, Fed officials are increasingly turning to real-time, on-the-ground information about the US economy; not from hard data crunched by government statisticians, but from feedback from ordinary business managers and consumers. Richmond Federal Reserve President Thomas Barkin, recently revealed that the Fed has been seeking insights directly from business leaders, often relying on a “show of hands” to judge inflation expectations and economic health.
The real estate market will be driven by a similar show of hands. As investors begin to believe that inflation is moderating and interest rates are declining, ?a recovery in values can be expected. Our version of a show of hands, is a laborious slog through the myriad forecasts which overwhelm our inboxes this time of year – not unlike this note.?
Central banks’ decisions on interest rates are pivotal in shaping real estate markets. Following aggressive rate hikes in previous years, 2025 is expected to bring further rate cuts, providing relief to investors and borrowers. CBRE forecasts, “Declining borrowing costs will stimulate a 15% increase in investment activity in 2025, reaching ￡53 billion”.
In Europe, interest rate reductions by the ECB and Bank of England are expected to have a profound impact. LaSalle states, “Falling inflation enabled the European Central Bank to cut policy rates first among major central banks this cycle, setting the stage for improved liquidity and returns”. JLL caution that “The Federal Reserve’s cautious approach to rate cuts will gradually improve liquidity but may temper the speed of recovery”.
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There is a big show of hands that, after prolonged declines in capital values, many regions are now seeing stabilisation. According to LaSalle, “The INREV ODCE index shifted in the latest quarters from declines to positive after seven down quarters. Pan-European real rent growth has also turned”. LaSalle highlights that “Investment volumes across Europe are ticking up, with prime sectors leading the recovery”. Meanwhile, in the UK, CBRE reports that “The property market reached the bottom of the cycle in 2024, and we expect values to rise further in 2025, driven by stronger rental growth”. Across the Atlantic, M&G’s global outlook notes, “valuations have largely stabilised, setting the scene for the next chapter”.
CBRE recommends early-cycle acquisitions: “Acquiring stabilised assets early in the recovery phase offers an opportunity to capture value before markets fully normalise”. Positioning for interest rate adjustments is equally critical. LaSalle notes, “Declining borrowing costs provide a unique window to refinance existing assets and fund new acquisitions strategically”. Natixis reinforces this, stating, “Monitoring central bank actions and aligning strategies with evolving macroeconomic conditions will be key to maximising returns”.
Historical data supports this strategy. JLL writes some of the highest five-year returns were achieved with investments transacted between 2009 and 2011, in the immediate aftermath of the GFC. In fact, CRE assets have outperformed most other asset classes over every five-year horizon since 1998 and, even during the GFC, investors with a five-year hold period in aggregate saw positive returns. Investors deploying capital in 2025 therefore, are likely to see an early-mover advantage in terms of returns that will diminish as the cycle matures. Hines identifies Europe as standing out across global markets, with 75% of its markets in the “Early Buy”, “Buy”, or “Strong Buy” phases, the highest globally. Oaktree Capital judge that an inflection point for core/core-plus real estate has been reached “following a significant reset in property values over the past two and a half years” supported by improving fundamentals, declining interest rates, and increased debt liquidity..?
Hodes Weill point to the reversal of the ‘denominator effect’ noting that “Over the past 12 months, institutional portfolios have shifted from over- to under-allocated to real estate”. Hodes Weill highlights the role of private equity in driving this trend: “Real estate continues to attract significant institutional capital, with allocations remaining strong despite broader market volatility”. Looking at allocation plans, institutional investors are most likely to add infrastructure (47%), private equity (45%), private debt (36%) and real estate (35%). According to the MSCI-BPCE Real Estate Solutions Barometer, 43% of investors plan to increase their real estate allocation in 2025.?However, Amundi advises that confidence should be tempered and they anticipate that turnover will not reach 2021 levels, and the market should remain very segmented.?
Public REITs have also rebounded, with the FTSE Nareit All Equity REITs Index on pace for double-digit returns in 2024, consistent with its 25-year average. Throughout the ups and downs of real estate cycles, REITs have maintained their unique characteristics in the CRE marketplace. NAREIT maintains that REITs have ready access to various capital sources, including equity, debt, and joint venture partnerships in contrast to many of their private real estate market counterparts who have been facing significant capital raising challenges with longer fundraising periods and lower proceeds. Preqin data show that aggregate real estate capital raised has been on a consistent downward trajectory since reaching a crest in 2021. REIT balance sheets have become fortress-like. Data from Nareit’s quarterly REIT industry tracker show that REITs have maintained low leverage ratios, focusing their financing activities on fixed interest rates, longer-term maturities, and unsecured debt. Third quarter 2024 data show that, on average, leverage ratios were low with debt-to-market assets at 30.7%, weighted average term to maturity of REIT debt was 6.5 years and weighted average interest rate on total debt was 4.1%. REITs’ typical longer-term investment focus has kept them reasonably well-insulated from rising interest rates. REIT access to unsecured debt has been an important differentiator compared to many private real estate companies.?
As real estate markets stabilise and interest rates decline, driven by central banks’ efforts to control inflation, 2025 presents a year of cautious optimism. However, much like the Federal Reserve’s deliberate approach to monetary policy, success requires a combination of data (the briefcase) and anecdotal evidence (the show of hands), equivalent to the contents and representation of Greenspan’s briefcase. This pivotal year offers the opportunity to transform a nascent recovery into sustainable, long-term growth. Perhaps a final synecdoche to the plethora of real estate adages of the last couple of years, from “do more in 2024” to “survive until 2025”, is the imperative to “thrive in 2025”, or risk exiting the game altogether.
See you in 2025. Merry Christmas and Happy Holidays.