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4 Reasons We Believe the Future of Commercial Real Estate Looks Bright for 2025
'We see the pillars of a real estate recovery coming into place,' Jonathan Gray, president and chief operating officer of Blackstone, said in January.1
Those pillars began looking relatively solid.2 Borrowing costs are high but beginning to fall,2 many lenders and owners are ready to make new deals, and investors of all sizes are raising capital to re-enter the market.
There's no sugarcoating it—commercial real estate (CRE) has faced a brutal stretch. Unprecedented circumstances, from a global pandemic to the sharpest rate-hiking cycle in decades,3 put the market through the wringer. But with the macroeconomic picture improving4 and rate cuts underway, there are reasons investors could feel optimistic about where this sector is headed.
Here are four reasons we believe the outlook for commercial real estate is sunny again.
Reason #1: Borrowing Costs Are Falling
Commercial real estate typically relies on debt, making it highly sensitive to interest rate changes. The sharp rise in rates in 2022 and 2023 created significant challenges for the industry, driving down prices and transaction volumes. Now, with the U.S. shifting from a tightening cycle to what appears to be a loosening one, a major headwind may be easing.
Further rate cuts, expected through 2025 and 2026, could help lift transaction volumes and prices.
Reason #2: Private Equity has Piled Up Cash
Asset managers are sitting on a record $2.62 trillion5 in cash reserves—the most 'dry powder' they've ever had. For two years, they've hesitated to deploy it in a high-rate environment.6 But with investor commitments and a ticking clock to deliver returns, they're under pressure to put that capital to work—fast.7
Some of this cash is targeting commercial real estate. Leading PE firms like Blackstone, KKR, Ares, and Carlyle Group are diving into CRE debt,8 with more capital lined up for acquisitions. This surge in 'smart money,' defined as investments made by knowledgeable financial professionals,9 could jumpstart broader CRE activity across the market.
Typically when more capital flows into CRE, values will often increase.
For a sector that's seen a lull in dealmaking,10 we believe this is an exciting tailwind.
Reason #3: The Supply Boom Is Starting to Absorb
When CRE demand spikes, builders get to work. But new builds typically take about two years to reach the market—and even then, it takes time to 'absorb' them, meaning to lease or sell to tenants and buyers. This lag can lead to oversupply whether that be temporary or permanent, pushing down valuations.
Now, a couple years after development surged in 2021 and 2022,11 the wave of new supply is finally being absorbed.
With absorption rising and new deliveries slowing,12 demand for real estate could outstrip supply in the coming years. This trend is particularly evident in the multifamily sector, which has seen positive net absorption for the past six quarters, even as supply hit a 50-year high.13
Reason #4: Owners Are Cutting Their Losses
Since the rate hikes, owners have largely held onto commercial properties bought in the era of cheap debt, hoping to wait out the downturn and avoid selling at a loss. This kept transaction activity at historic lows14—and the market needs deals to draw in fresh capital.
That's starting to change. Long-held properties are hitting the market at steep discounts.15 While some owners are taking losses, in the long run, this may open the door for new investors and free up capital.
We believe as distressed inventory clears out, prices could stabilize, and transaction activity may keep rising.
Potential Areas for Caution in 2025
The recovery seems to be underway, but it won't be even.16 While the market's fundamentals are improving, some challenges are here to stay. Here's what to keep in mind in a shifting market.
First, CRE isn't a monolith. Regions and asset classes won't recover with the same tide. Investors are optimistic about digital economy properties and multifamily, but the office sector is still weighed down by high vacancies.17 CRE opportunities should be evaluated on their own merits—not assumed to follow sector-wide trends.
Second, the pace and scale of interest rate cuts remain uncertain. While lower borrowing costs can be a boost, it's too early in the easing cycle to assume stable debt costs.
There may be optimism in CRE, but caution is key in navigating an uneven market.18
Finding Opportunities in an Uneven Recovery
As new investors step into the market, it's essential to choose opportunities in the real estate cycle selectively—and with the best information behind you.
Crowd Street connects investors with opportunities in commercial real estate. For more on the market and insights on our deals and process, check out Crowd Street's U.S. Commercial Real Estate Investing Outlook H2 2024.
1 https://www.perenews.com/blackstones-gray-the-pillars-of-a-real-estate-recovery-are-forming/
3 https://www.forbes.com/advisor/investing/fed-funds-rate-history/
4 https://www.reuters.com/markets/us/us-economy-posts-solid-growth-election-eve-2024-10-30/
9 https://www.investopedia.com/terms/s/smart-money.asp
10 https://irei.com/news/cre-transaction-volume-expected-to-increase-in-2025/
11 https://www.fool.com/research/commercial-real-estate-investing-statistics/
12 https://www.globest.com/2024/07/30/multifamily-nears-inflection-point/?slreturn=20241120195926
13 https://www.realpage.com/analytics/3q-2024-data-update/
15 https://www.nytimes.com/2024/06/12/business/distressed-office-buildings-buyers.html
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