Commercial Real Estate: Is 2025 Going to Be Different?

Economic growth, improving real estate fundamentals could drive a moderate recovery in real estate investment activity.

Art by Melinda Beck

 


Elevated interest rates, inflation, a shift in where people work and an uneven global economic recovery battered the commercial real estate market for the past few years, but the sector could see a moderate recovery in investment activity in 2025 as inflation eases and some global central banks loosen monetary policy.

Pedro Guazo, representative of the secretary-general for the investment of the $95.3 billion United Nations Joint Staff Pension Fund, says the fund is “cautiously optimistic” for 2025.

“The question we ask internally is, ‘Did the trendline reverse?’ rather than, ‘Is this the absolute bottom?’” Guazo said in an email. “In that respect, we believe we are near the cycle’s bottom.”

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But, like everything in real estate, location matters.

Institutional investors and managers see selective opportunities in the U.S., Australia, the U.K. and Europe, but China’s markets are still considered too risky for 2025. While location matters, so do sectors. Overall, traditional office real estate remains overvalued, as the work-from-home phenomenon continues to reshape work life, investors and managers say, but non-traditional real estate, such as housing and data centers, appeals.

Unlike previous real estate cycles, some managers are weighing climate change impacts and insurance costs in their calculations as the combination of higher property values and more unpredictable and destructive natural disasters will affect long-term values.

For investors still wary of real estate, Bert Crouch, head of North America at Invesco Real Estate, suggests now may be the time to start looking, especially for those seeking an alternative to equities. After recent weakness, the asset class is under-owned and, in the U.S., he says the market has broadly bottomed. According to Crouch, in the five-year periods after 2001’s dot-com bubble and following the global financial crisis in 2009, investors who bought real estate saw unlevered returns in the low to mid teens.

“Simply put, you’ve been rewarded for leaning in early,” he says.

Invesco’s Crouch also points to opportunities in real estate lending by private credit investors as attractive. It’s still his top idea for 2025 for real estate, across sectors. “I would rather lend than buy,” he says.

He says most loans Invesco makes have 65% loan-to-value ratios on high-quality real estate. Invesco can lend at rates about 250 to 300 basis points greater than the secured overnight financing rate of 4.3%, giving a yield of about 7%. Using some leverage, that yield can rise to 12%, he adds.

Certain Housing Areas Attract Interest

In many countries, housing demand outstrips supply, as demographics shift and lifestyle preferences evolve, making housing a compelling choice for investors and managers. Immigration and household growth increase demand, while higher interest rates make mortgages costly, forcing would-be buyers to rent. Investors see opportunities in multi-family housing, single-family rentals, student housing and senior living.

Jeroen Beimer, head of research at the 16-billion-euro ($16.68 billion) manager Bouwinvest Real Estate Investors, which manages real estate portfolios for Dutch and international institutional clients, says 2024 yielded strong rental growth that he expects to continue.

“If you can find places where there will be substantial rental growth, that’s where we expect in the coming two or three years that these markets will outperform,” he says.

Among the top locations for rental growth are apartments and single-family housing in the U.S. Sun Belt states, which continue to see migration of workers and businesses, Beimer says. Guazo agrees, noting that the U.N.’s Joint Staff Pension Fund is targeting the same sectors. He says 70% of the portfolio is anchored in the U.S.

Beimer says he sees tailwinds in growing metro areas in Canada and Australia, but also some large cities such as Singapore, Tokyo and Osaka, Japan. In North America, he sees student housing and senior housing as other strong sectors.

Stephen Hayes, head of global property securities for Sydney-based $157 billion manager First Sentier Investors, points to opportunities in Australia, including land-lease communities—which often cater to people age 55 and older—offering returns (based on implied capitalization rates) of 5.8% and self-storage facilities, which have an implied cap rate of 7.3%.

Guazo also likes Australia’s prospects, particularly student housing, while in Japan, he says there are “compelling” multi-family opportunities.

 

Data Centers Grow in Multiple Markets

Data centers also remain attractive, according to most sources. Guazo says the U.N. fund has been investing in the sector since 2017 and has expanded its exposure globally.

“Demand driven by AI is unprecedented, with growth in data consumption significantly exceeding even our most optimistic expectations,” he says.

Even in Europe, where many real estate markets are sluggish, data center growth is a highlight. Hayes points to demand in cities such as Paris and Frankfurt, Germany, and data centers are quickly expanding across Spain, with implied cap rates of 9%.

The slowing economy in the U.K. has opened rare opportunities in London, Hayes says, particularly in publicly traded real estate in London’s West End. Prices are down there because of macroeconomic headwinds stemming from the government’s new fiscal budgets, which raised the national living wage and drove business costs higher. General valuations in London’s West End have an implied 6.1% cap rate.

“Looking through that noise, we see over the next five to 10 years, some very good returns to be had, given the implied valuation,” Hayes says, adding that London’s West End is “just such a unique real estate market, it really can’t be replicated. And the implied valuations, we think are just extremely appealing.”

The logistics market, which includes warehouses, has been attractive for a while due to the  boom of online shopping, but Beimer and Hayes suggest that supply is catching up with demand. Hayes is cautious about logistics in an era when the U.S. intends to impose tariffs on imports.

“Some markets will do fine, and others will be impacted by tariffs, and it’ll be pretty tough,” Hayes says. “So it’s not looking extremely appealing to us.”

 

Insurance Costs to Rise

Rising insurance costs will have long-term implications for returns. Climate-change-driven natural disasters are becoming more unpredictable, and more high-value real estate is being built in areas that have increased risk for natural disasters, driving up costs.

Bouwinvest’s Beimer says that even if a property is not at a particularly increased risk for climate change impacts, higher insurance costs could still be a factor.

“If you are in investing in real estate, and the real estate insurance costs are too high … then it’s affecting the real estate markets in a second-order effect,” he says. “Maybe in the longer term, the second-order effects might be having a larger impact than we now anticipate.”

Hayes concurs. He is less concerned about the individual impacts of specific natural disasters, because of his portfolio’s diversification, than he is about the broader insurance costs.

“We need to factor in those increases in costs, which are likely to continue to be quite material over time, and try and get an understanding of what that’s going to do to operating margins and valuations,” he says.

More on this topic:

Is the Commercial Real Estate Tide Turning?
Institutional Investors See Resilience in Commercial Real Estate

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