After years of higher interest rates and speculation in the commercial real estate market, the sector may finally regain more momentum in 2025 – albeit at a slower pace than some had hoped earlier this year.
“2025 is a turning point for commercial real estate investment,” Marcus & Millichap CEO Hessam Nadji told me. “The market is starting to come to terms with the fact that we are not going back to the lows of the previous cycle.”
He is optimistic across all major commercial real estate properties thanks to job growth, steady consumption, and low unemployment.
“The CRE supply/demand balance is the best it has been in years as construction is limited in most segments,” added Nadji.
It is important to note that much of the weakness in the commercial real estate sector is concentrated within the office sub-sector. Data compiled by SMBC found that office values have fallen off a cliff since the start of the pandemic, dropping a staggering 41% from 2020.
But the performance of the sector is starting to stabilise. A recent analysis by Alan Todd of Bank of America found that rents have stabilized from a year ago and vacancy rates are falling.
Although the Federal Reserve recently indicated two rate cuts next year instead of the four previously forecast, lower rates will still help bring about a long-awaited rebound.
The benefits will reverberate beyond office space across the larger CRE sector as lower rates mitigate refinancing risks and boost capital activity.
“There's a lot of capital raised and ready to go, and a lot of the fundamentals that underpin most types of property are still very strong,” Andrew Alperstein of PWC told me.
And the CRE market is already showing signs of recovery amid increased optimism following two years of falling property values and sluggish transaction and lending activity. PWC's New Trends survey found that nearly two-thirds of respondents expect their company's profits to be “good” or “excellent” in 2025, compared to just 41% a year ago.
Experts tell me two areas of strength in the commercial real estate sector for the new year are data centers and retail.
“Data centers are the talk of the town. There is a lot of positive tail and momentum around data centers, especially with the focus of productive AI across so many aspects of the economy,” Alperstein explained. “We expect very strong continued rent growth in the data center space.”
And retail is the other area in a position to outperform the CRE, according to Nadji, who expects record vacancy rates and “modest” revenue growth.
“The optimism and demand for wellness is at a 20-year high because people are going back into stores and digital brands are creating brick and mortar showrooms … this is the love of the industry,” Nadji explained.
For investors, this could signal a major 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 because of their high dividend yields.
The group is required to pay out 90% of their taxable income in dividends, making them an increasingly compelling option as rates on savings accounts and CDs fall.
Michael Goldsmith of UBS identified a number of key themes across the REIT sector through conversations with industry insiders and recent earnings reports, including expectations for supply pressures to ease across apartment, industrial, storage and single-family rental subsectors , as well as a more active transaction market. .
“Companies across REIT sub-sectors have noted that the transaction market is reopening with seller expectations normalizing and closing bid/ask spreads. However, we expect this to be another area where companies provide a wide range in their initial guidance given the unknowns,” Goldsmith wrote.
Goldsmith sees attractive investment opportunities across self-storage, retail, industrial and cold storage, and triple REITs. His Buy recommendations include ExtraSpace Storage (Ex), Kimco Realty (KIM), Prologis (PLD), and Realty Income Corporation (Oh).
Bank of America is overweight Real Estate in the new year, citing three factors: higher yields, attractive valuations, and that the proportion of S&P real estate companies with a quality rating of B+ or higher has more than doubled.
“We believe the 2025 backdrop is positive for REIT fundamentals. Public REITs maintain the cost of capital and access to capital advantage over private owners, and stable interest rates can provide enough visibility to fuel transactions as the gap between buyers and sellers narrows,” Bank of America's Jeffrey Spector wrote in a note to clients.
Spector's top picks for 2025 include American Healthcare REIT (AHR), Cousins Properties (CUZ), and Welltower (WELL), indicating the pricing power and earnings visibility of each company.
Sean Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Suggestions on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.
