After years of higher interest rates and speculation of a reckoning in the commercial real estate market, the sector could finally regain momentum in 2025 — albeit at a slower pace than some had hoped earlier this year.
“2025 is a turning point for commercial real estate investing,” Hessam Nadji, CEO of Marcus & Millichap, told me. “The market is starting to come to terms with the fact that we are not going back to the lows of the last cycle.”
He is bullish on all major commercial real estate types thanks to job growth, steady consumption and low unemployment.
“CRE’s supply-demand balance is the best it has been in years, as construction is limited in most segments,” Nadji added.
It is important to note that much of the weakness within the commercial real estate sector is concentrated in the office subsector. Data collected by SMBC shows that office values have fallen off a cliff since the start of the pandemic, with a staggering 41% drop from 2020.
But the sector’s performance is starting to stabilize. A recent analysis by Alan Todd of Bank of America shows that rents have remained at a plateau compared to a year ago and vacancy rates are declining.
Although the Federal Reserve recently indicated two interest rate cuts for next year instead of the previously predicted four, lower interest rates will still contribute to a long-awaited recovery.
The benefits will reverberate beyond the office space into the larger CRE sector as lower rates reduce refinancing risks and stimulate capital activity.
“There’s a lot of capital raised and ready to be deployed, and many of the fundamentals that underpin most real estate types are still very strong,” PWC’s Andrew Alperstein told me.
And the CRE market is already showing signs of recovery, amid increased optimism after two years of declining real estate values and sluggish transaction and lending activity. PWC’s Emerging Trends survey shows that almost two-thirds of respondents expect their company’s profits to be “good” or “excellent” by 2025, compared to just 41% a year ago.
Experts tell me that two strong points 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, especially with the generative AI focus in so many facets of the economy,” Alperstein explains. “We expect very strong continued rental growth in the data center space.”
And retail is the other area within CRE positioned to outperform, said Nadji, who expects record low vacancy rates and “moderate” sales growth.
“The optimism and amount of rental demand is the highest in 20 years as people return to stores and digital brands create physical showrooms… it is the darling of the industry,” Nadji explains.
For investors, this could mean 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 for their high dividend yields.
The group must pay out 90% of their taxable income in dividends, making them an increasingly attractive option as interest rates on savings accounts and CDs fall.
Michael Goldsmith of UBS has identified several key themes in the REIT sector through conversations with industry insiders and recent earnings reports, including expectations of easing supply pressure in the apartment, industrial, storage and single-family rental subsectors, as well as a more active transaction market .
“Companies in the 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 a wide range of initial guidance given the unknowns,” Goldsmith wrote.
Goldsmith sees attractive investment opportunities in 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 the fact that the share of S&P real estate companies with a quality rating of B+ or higher has more than doubled.
“We believe the backdrop for 2025 is positive for REIT fundamentals. Public REITs maintain a cost of capital and access to capital advantage over private owners, and stable interest rates can provide enough visibility to fuel transactions, narrowing the gap between buyers and sellers,” Bank of America’s Jeffrey Spector wrote in a letter to customers.
Spector’s top picks for 2025 include American Healthcare REIT (AHR), Cousins Properties (CUZ) and Welltower (WELL), citing each company’s pricing power and earnings visibility.
Seana Smith is an anchor at Yahoo Finance. Follow Smit on Twitter @SeanaNSsmith. Tips about deals, mergers, activist situations or something else? Email seanasmith@yahooinc.com.
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