The U.S. commercial real estate (CRE) market is poised for modest growth in 2025 despite the ongoing challenges posed by elevated interest rates. According to CBRE’s latest 2025 U.S. Real Estate Market Outlook, the market has shown resilience, particularly in the multifamily sector, which is expected to remain strong in the coming years.
One of the key factors affecting the CRE market in 2025 is the Federal Reserve’s ongoing battle with inflation. Despite the Fed’s rate hikes over the past year, commercial real estate investment volume is expected to experience a slight increase. CBRE anticipates that overall CRE investment will see a moderate uptick, driven by strong investor demand for prime properties in select markets.
Market Trends
According to CBRE, while the office market will continue to struggle with vacancies and remote work trends, there is an overall shift towards hybrid workspaces and flexible leasing options. As businesses continue to adapt to new working models, demand for traditional office space has plateaued. However, there is still demand for high-quality office properties that provide amenities conducive to the evolving needs of tenants.
The multifamily market is expected to be the star of the show in 2025. The sector’s steady growth is attributed to the continuing demand for rental properties across the U.S., fueled by the affordability crisis in the housing market. With homeownership rates declining, many Americans are turning to rental properties, thus providing a stable market for multifamily developments.
Impact of Rising Interest Rates
Despite the potential for increased investment in the commercial sector, the ongoing high interest rates are a significant challenge. Financing costs for developers and investors have increased due to the Fed’s actions to curb inflation. This has made large-scale projects more expensive and reduced the volume of new developments coming to market.
Moreover, the elevated rates have also impacted property valuations. Investors are becoming more cautious, particularly in sectors like retail, which continues to grapple with the impacts of e-commerce growth and shifting consumer behaviors. While industrial properties have generally performed well due to the expansion of logistics and e-commerce distribution networks, there is uncertainty about how long this trend can continue if the economy enters a recessionary period.
Resilient Sectors: Retail and Industrial
Though retail spaces continue to face significant challenges, there are pockets of opportunity. Retail investors are focusing on high-traffic areas, particularly those in suburban locations with strong consumer demand. Malls and shopping centers that can adapt to the changing retail environment by offering diverse experiences, such as entertainment and dining, are expected to perform better than traditional retail hubs.
In the industrial sector, demand remains robust for warehouses and distribution centers. E-commerce has fueled a continued need for logistics and last-mile delivery hubs. As a result, industrial real estate is forecast to be one of the better-performing sectors of commercial real estate, despite challenges posed by higher borrowing costs.
Future Outlook
Looking ahead, CBRE believes the commercial real estate market in 2025 will continue to evolve in response to demographic shifts and economic conditions. The trend of urbanization, for example, is expected to fuel demand for mixed-use developments, particularly in city centers and near transit hubs.
In addition, investors are expected to prioritize sustainability and green building certifications. With growing concerns about climate change and environmental responsibility, eco-friendly commercial buildings are gaining in popularity. Buildings that incorporate energy-efficient systems, renewable energy sources, and sustainable building materials are likely to attract tenants willing to pay a premium for environmentally conscious spaces.
Conclusion
While the CRE market faces challenges, especially with rising interest rates and economic uncertainty, there are clear areas of opportunity. The multifamily sector remains a strong performer, and industrial properties continue to benefit from the growth of e-commerce. However, sectors like office and retail require careful consideration and adaptation to new trends and market conditions.
Investors and developers who can navigate these challenges and leverage trends such as sustainability, hybrid work, and technology integration will be better positioned to thrive in 2025 and beyond.
