After years of higher interest rates and speculation of a reckoning in the commercial real estate market, the sector may finally regain more momentum in 2025 — albeit at a slower pace than some had hoped for earlier this year.
“2025 is a turning point for commercial real estate investment,” Marcus & Millichap CEO Hessam Nadji told me. “The market is beginning to come to terms with the fact that we’re not going back to the lows of the previous cycle.”
He’s optimistic across all major commercial real estate property types thanks to job growth, steady consumption, and low unemployment.
“CRE supply/demand balance is the best it’s been in years as construction is limited in most segments,” Nadji added.
It’s important to note that much of the weakness within the commercial real estate sector has been concentrated within the office subsector. Data compiled by SMBC found that office values have fallen off a cliff since the start of the pandemic, declining a staggering 41% from 2020.
But the sector’s performance is starting to stabilize. Recent analysis from Bank of America’s Alan Todd found that rents have plateaued from a year ago and vacancy rates are declining.
Though the Federal Reserve recently indicated two rate cuts next year instead of the previously forecasted four, lower rates will still help bring a long-awaited rebound.
The benefits will reverberate beyond office space across the larger CRE sector as lower rates alleviate refinancing risks and boost capital activity.
“There’s a lot of capital that has been raised and is ready to be deployed, and a lot of the fundamentals underlying most property types are still very strong,” PWC’s Andrew Alperstein told me.
And the CRE market is already showing signs of recovery amid increased optimism following two years of declining property values and sluggish transaction and lending activity. PWC’s Emerging Trends survey found that nearly two-thirds of respondents expect their firm’s profit to be “good” or “excellent” in 2025, compared to just 41% a year ago.
Experts tell me two areas of strength within the commercial real estate sector for the new year are data centers and retail.
“Data centers are the talk of the town. There are a lot of tailwinds and positive momentum around data centers, particularly with the generative AI focus across so many facets of the economy,” Alperstein explained. “We’re expecting really strong continued rent growth in the data center space.”
And retail is the other area positioned to outperform within CRE, according to Nadji, who expects record-low vacancy rates and “moderate” revenue growth.
“The optimism and the amount of lease demand is at a 20-year high because people are going back into stores and digital brands are creating brick-and-mortar showrooms … it’s the darling of the industry,” Nadji explained.
For investors, this could signal a big buying opportunity in REITs, or real estate investment trusts. While cheap valuations and broader structural challenges have created an attractive buying opportunity for value-oriented investors, REITS also stand out because of their high-dividend yields.
The group is required to pay out 90% of their taxable income in dividends, making them an increasingly compelling option as rates on savings accounts and CDs drop.
UBS’s Michael Goldsmith identified several key themes across the REIT sector through conversations with industry insiders and recent earnings reports, including expectations for supply pressure to abate across apartments, industrial, storage, and single-family rental subsectors, as well as a more active transactions market.
“Companies across REIT subsectors have indicated that the transaction market is reopening with normalizing seller expectations and a closing bid/ask spread. However, we expect this to be another area where companies provide wide ranges in their initial guidance given the unknowns,” Goldsmith wrote.
Goldsmith sees attractive investment opportunities across self storage, retail, industrial and cold storage, and triple-net REITs. His Buy recommendations include ExtraSpace Storage (EXR), Kimco Realty (KIM), Prologis (PLD), and Realty Income Corporation (O).
Bank of America is overweight Real Estate heading into the new year, citing three factors: higher yields, attractive valuations, and that the share of S&P real estate companies with a quality rating of B+ or higher has more than doubled.
“We believe the 2025 backdrop is positive for REIT fundamentals. Public REITs maintain a cost of capital and access to capital advantage over private owners, and stable interest rates may provide enough visibility to fuel transactions with the gap between buyers & sellers narrowing,” Bank of America’s Jeffrey Spector wrote in a note to clients.
Spector’s top picks for 2025 include American Healthcare REIT (AHR), Cousins Properties (CUZ), and Welltower (WELL), citing each firm’s pricing power and earnings visibility.
Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
