The Outlook for Commercial Real Estate (Even Office) in 2025 Is Positive

Following several years of elevated inflation, muted growth and general uncertainty, commercial real estate could be positioned for an upswing.

Victor Calanog, global head of research and strategy for real estate private markets at Manulife Investment Management, expressed optimism about the industry’s future: “The industry is poised to be in a better place compared to the last few years. It appears that the landing will be relatively soft, which should sustain positive momentum for economic activity, benefiting key drivers such as leasing, rents and occupancies.”

Overall, the outlook for the 2025 commercial real estate is positive. The industrial sector remains the industry’s darling. Multifamily and retail continue to perform well, although they do have vulnerabilities. In some markets, even office vacancy rates are beginning to moderate.

Let’s take one sector at a time.  

The industrial real estate sector remains strong, driven by e-commerce and logistics demands, warehouses and other industrial properties that are still highly sought after. In the third quarter of 2024, industrial vacancy rates decreased 10 basis points to 6.7 percent, marking the first decline since the same time in 2022, Moody’s CRE reported. Still, vacancy rates remain well below pre-pandemic averages.

Following multiple years of volatility, some office markets may be normalizing. The office sector’s vacancy rate held steady in the third quarter at 20.1 percent following record-high levels for three straight quarters, according to Moody’s CRE. “There are some suburban office markets that are showing signs of cap rate flatness or even declines,” Calanog said. But office’s dynamics can vary significantly from one city to the next. For example, New York’s third-quarter vacancy rate was 13.1 percent, while San Francisco’s was 20.5 percent, according to Moody’s CRE.

As office markets strengthen, there’s a positive correlation with retail: More people are commuting in, out and around cities, which means more economic opportunities. 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 are also performing well, as consumers often prefer to purchase luxury items in person.

One thing that hasn’t changed is the demand for multifamily properties. But some markets, such as Austin, Raleigh-Durham and Nashville, have experienced overbuilding of Class A properties. As a result, many apartment property managers have made concessions. Instead of keeping the properties Class A, property managers can offer units to renters of different income levels. For example, 30 percent of units could be set aside for renters making less than 80 percent of the area median income.

There are a host of concerns in commercial real estate, however, that are likely to factor into investment decisions and new innovations throughout 2025. Leading this list are exposure to increasingly intense natural disasters, cybersecurity risks and interest rate uncertainty.

Natural disasters are growing more intense — and increasingly costly. To effectively address potential future damages, the commercial real estate sector should make major investments now. That starts with implementing deep-energy retrofits to buildings, which may qualify for green discounts and preferential pricing from Fannie Mae and Freddie Mac. The industry should also invest in large-scale efforts, akin to the Netherlands’ extensive dikes and flood infrastructure. While the upfront costs can be substantial, this type of large-scale engineering can ultimately reduce expenses. 

Just as important is deciding where not to invest. For example, careful analysis may determine some locations may be too susceptible to hurricanes or wildfires to warrant building properties.

Commercial real estate is not immune to cybersecurity and fraud attacks, either. In 2023, 80 percent of organizations reported being targets of payments fraud, a 15 percent increase from 2022, according to the 2024 AFP Payments Fraud and Control Survey Report. Commercial real estate organizations can protect themselves by maintaining up-to-date systems, investing in cybersecurity and fraud employee training, and practicing good cyber hygiene, such as segregating duties, documenting procedures, and using multifactor authentication. 

Although the Federal Reserve cut interest rates in 2024, there’s no guarantee the easing cycle will continue, and interest rate uncertainty remains top of mind for all. The timing and pace of further rate decreases will depend on many factors, including the totality of future economic data. Some of the incoming administration’s policies could lead to increased inflation, complicating the Fed’s economic predictions and muddling the outlook for interest rates.

Despite these challenges, positive momentum across all sectors will be felt in commercial real estate. The year ahead could provide opportunities for investors, developers, property managers and others in the industry within affordable housing and public-private partnerships.

The demand for affordable housing continues to outweigh supply. Increasing supply remains an uphill battle as elevated construction costs, interest rates and operating expenses continue to challenge the sector. To combat these issues, the industry is taking innovative approaches. For example, J.P. Morgan’s Agency Lending and Workforce Housing Solutions groups offer unique financing for affordable and workforce housing. Modular construction may also be a viable method to increase affordable housing. There are hurdles to its widespread use, including a limited number of manufacturers, which can drive up transportation costs. 

Strong public-private collaboration has a key role to play in development, especially around affordable housing. Government bodies may own land they can lease to apartment developers at a discount. Likewise, many local governments offer tax credits, grants or low-interest loans to private affordable housing developers. Public entities can also help reduce the red tape associated with development by expediting permits and regulatory processes. 

Commercial real estate developers benefit from regular communication with public entities to stay abreast of zoning and regulation changes and to quickly resolve any development issues. 

The bottom line is that the 2025 commercial real estate outlook is largely optimistic, with robust performance in the industrial sector and steady retail growth. While climate change concerns, cybersecurity threats and interest rate uncertainty persists, opportunities in affordable housing and public-private collaboration offer promise for growth and innovation.

Al Brooks is head of commercial real estate at J.P. Morgan Chase.