2025 Outlook: What’s Next for Commercial Real Estate?
2025 presents an uncertain but potentially lucrative economic landscape. Americans have more spending power this year (albeit with lingering high prices and tighter credit conditions), and inflationary pressures may ease as the Federal Reserve maintains a measured approach to monetary policy. With President Trump coming to office this month, investors are cautiously optimistic.
Overall, we can expect the following:
- President Trump will pursue a pro-business agenda, rolling back regulations to reduce costs and barriers for businesses that will benefit investors.
- “Trump tariffs” could be a challenge for businesses and investors but could be selectively effective.
- Other challenges include high interest rates; labor constraints; and a demand for more housing coupled with slowed construction.
Americans who thought they were going to get bailed out by lower rates this year will be disappointed. However, the economic situation presents an opportunity for investors with capital to invest in real estate.
Labor Shortages
There are about 8 million unfilled jobs in the U.S. right now. Part of the problem is that Baby Boomers who have been a key part of the construction industry are now leaving the labor force, and fewer high school graduates are pursuing trades.
This reduced labor pool in construction and skilled trades could hinder growth in the commercial real estate sector in 2025 by increasing project delays and driving up construction costs. This challenge may also deter investments, as higher labor costs shrink profit margins.
There is also the question of potential deportations in 2025, which could impact the labor force even more. But, as Foreign Policy pointed out recently, “Many of Trump’s wealthy donors rely on foreign workers, including unauthorized migrants.” So the future of the labor force is still uncertain.
Housing
Persistent housing shortages, coupled with elevated mortgage rates, continue to push many households toward renting.
According to the U.S. Census Bureau, nearly 40% of homes in the country were mortgage-free last year. Millions of Americans have locked in low mortgage rates: In the second quarter of 2024, for example, 21.6% of outstanding mortgages had an interest rate below 3%, and 34.6% had a rate between 3% and 4%.
With 56.2% of outstanding mortgages at 4% or below, this “lock-in” effect reduces housing inventory, driving up demand for rental properties as potential homebuyers struggle to find affordable options (an exception is the Southeast, especially Florida, which has seen a rise in home inventory).
Multifamily properties, including build-to-rent communities, are likely to see increased demand and sustained rental growth, making them attractive investments. However, there is a strong need for more single family housing, as well as niche housing like senior living and student housing.
Developers are increasingly focusing on mixed-use properties, blending residential units with retail and office spaces. However, they’re facing challenges like rising construction costs and ESG considerations, with green building certifications and energy-efficient designs gaining traction among investors and tenants.
Retail
Contrary to what many people thought, e-commerce did not spell the end of brick-and-mortar retail. According to JPMorgan Chase, retail “continues to perform well, largely driven by grocery-anchored neighborhood shopping centers in densely populated urban and suburban locations.”
High-end retail shopping centers will also continue performing well, since consumers typically prefer to purchase luxury items in person.
There is also a growing need for more retail space in 2025 in the Sun Belt, as demand for retail real estate has grown rapidly while construction has lagged behind. One reason is that many retail brands are flocking to the Sun Belt (and 12 of the 15 fastest-growing cities in the U.S. are in the Sun Belt). Sun Belt states have 13% less retail space available than the national average. In cities like Charlotte, Nashville, and Tampa, retail inventory is less than 3.5%.
Offices
CBRE foresees stability for the office market in 2025 with slight improvement toward the end of the year – anticipating a 5% increase in overall office leasing volume in 2025.
Workers are headed back to the office (led by return-to-office mandates from companies like Amazon and Goldman Sachs). Approximately 80% of organizations have put in place return-to-office policies. And the office sector’s vacancy rate declined to 20% following record-high levels for three straight quarters, according to Moody’s CRE.
But the office sector has not stabilized yet. Office’s dynamics can vary significantly from one city to the next, according to JPMorgan Chase. For example, New York’s Q3 vacancy rate was 13.3%, while San Francisco’s was 22.1%.
New Administration Policies
The policy implications from a second Trump presidency are expected to affect CRE through curbed immigration, tax cuts, and increased tariffs, according to Oxford Economics.
Tax Cuts:
If Trump continues advocating for lower corporate taxes or introduces additional tax breaks, it could increase profitability for businesses, leading to higher demand for office, industrial, and retail spaces.
Deregulation:
Deregulation could ease restrictions on development projects, potentially spurring new construction in CRE sectors. A new analysis from Realtor.com found that Trump’s proposed housing deregulation could slash new home construction costs by a whopping $90,000 per unit.
Border restrictions:
Stricter border controls and policies affecting cross-border trade, like tariffs, could disrupt supply chains. The deportation of undocumented workers could exacerbate labor shortages in the construction industry, driving up costs for new CRE developments.
Tariffs:
Tariffs *could* impact industrial real estate positively. Tariffs on imported goods could incentivize companies to move production back to the U.S. to avoid higher import costs. This shift could lead to increased demand for industrial spaces such as manufacturing facilities and warehouses.
Still, “Trump’s proposed tariffs and immigration policies are rattling commercial real estate developers,” according to CRE Daily. Higher material costs due to tariffs on steel, aluminum, or other construction materials might increase construction costs and potentially slow down new construction. And if tariffs contribute to inflation, the Federal Reserve might respond with tighter monetary policy, increasing borrowing costs and potentially cooling CRE investment.
Conclusion
Overall, the CRE economic outlook for 2025 is positive. For those with capital available (who do not need to rely on construction loans), 2025 could be a great year for CRE investment. Now is a great time to plan and be prepared for those opportunities that present themselves. Real estate assets have proven to perform well in time, even with consistent inflation. Particularly, multifamily housing remains an attractive asset class as high mortgage rates and housing shortages keep rental demand elevated.
Despite potential headwinds like rising interest rates and economic uncertainty, investors who focus on long-term trends and strategic locations could find 2025 ripe with opportunities for strong returns.
